Were CYFD payments to Kimberly Flores for caring for her grandchildren at home subject to New Mexico gross receipts tax?

Plain-English summary

Payments Kimberly Flores received from New Mexico CYFD for providing child care to her grandchildren in her home were subject to gross receipts tax. The Department could offset a $200 income tax rebate against the liability, and statutory interest remained due. The decision's main analysis applied negligence penalty but reduced it from a 20% to a 10% maximum.

The published decision contains an important internal inconsistency. Its penalty analysis and numbered conclusions say negligence was established and only penalty above 10% should be abated. A separate unnumbered sentence on the final page instead says the taxpayers were not negligent and “the negligence penalty ... should be abated.” The final order directs the Department to abate 10% of the penalty amount rather than all penalty. This summary reports the dominant analysis and final order while preserving the contradictory sentence below in the original text.

CYFD paid Flores for in-home child care

Kimberly Flores provided paid child care in 2005 and 2006 under an agreement with CYFD. The decision says she cared for her grandchildren in her residence and was compensated by the state.

The Floreses reported $5,787 of receipts for 2005 and $4,572 for 2006 on federal Schedule C but reported no gross receipts on their New Mexico returns. IRS information matching led to a limited-scope audit.

The Department assessed:

• For 2005: $365.98 tax, $73.20 penalty, and $135.17 interest.
• For 2006: $291.60 tax, $58.32 penalty, and $63.99 interest.

State-paid child care was expressly taxable

New Mexico imposed gross receipts tax on money received from performing services in the state. The cited regulation addressed this fact pattern directly: child care provided in a residence was taxable when New Mexico paid for the children's care.

Flores had attended a class connected with the CYFD payments and was told that she would be responsible for taxes because the state would not withhold them. New Mexico also issued a Form 1099 for the income.

The hearing officer therefore held that the two years of child-care receipts were taxable.

The $200 income tax rebate could be offset

The Floreses asked the Department to return a $200 income tax rebate that had been applied against the 2005 gross receipts tax principal.

Section 7-1-29(C) allowed the Secretary, in the Secretary's discretion, to offset a refund against another tax for which the recipient was liable after giving notice. The Department sent an offset notice and applied the $200 to the outstanding principal. The decision upheld that action.

Tax-preparer involvement did not establish reliance on advice

Flores expected her tax preparer to handle taxes properly, but the record did not show any specific discussion about New Mexico gross receipts tax or advice that the child-care payments were exempt.

Under the cited nonnegligence rule, reasonable accountant reliance required advice on the liability after full disclosure of relevant facts. The analysis found only the taxpayers' erroneous belief that no state tax applied, which fell within the negligence definition.

Financial hardship and William Flores's illness did not authorize removal of statutory penalty or interest.

The main penalty analysis used the 10% cap

The Department applied a 20% maximum. The decision's analysis held that the 2005 and 2006 liabilities were governed by the former 10% cap and that no retroactivity provision allowed another 10 percentage points after the prior maximum had been reached.

Numbered conclusion D says penalty could not exceed 10%. The final order directed the Department to abate 10% of the penalty amount unless it had already done so.

As noted above, the isolated contrary sentence saying the taxpayers were not negligent is unresolved within the source itself.

Interest remained mandatory

Section 7-1-67 required interest until principal was paid. Neither hardship nor lack of intent gave the Department or hearing officer discretion to waive it.

Result: protest GRANTED IN PART and DENIED IN PART. Tax, the $200 offset, and interest were upheld; the final order reduced penalty consistent with a 10% cap, subject to the source's contradictory nonnegligence sentence.

What this means for you

Family child-care providers paid by the state

A government payment and Form 1099 can create gross receipts tax even when no tax is withheld. The regulation cited here specifically covered state-paid child care in a residence.

Taxpayers expecting a preparer to handle everything

Ask directly whether the income creates gross receipts tax and document the advice. General return preparation is not proof that you relied on a considered opinion about a separate business tax.

Readers using older administrative decisions

Check the analysis, numbered conclusions, and final order against one another. This decision demonstrates why preserving the verbatim source matters when the agency document contains conflicting language.

Common questions

Q: Why were payments for caring for grandchildren taxable?
A: Flores was paid by CYFD to provide child care in her home, a situation the cited regulation expressly treated as taxable gross receipts.

Q: Could the Department keep the $200 income tax rebate?
A: Yes. It gave notice and offset the rebate against an outstanding tax liability under Section 7-1-29(C).

Q: Did the decision uphold negligence?
A: The analysis and numbered conclusions did, but one contradictory unnumbered sentence on the final page says otherwise.

Q: What did the final order do with penalty?
A: It directed abatement of 10% of the penalty amount, consistent with reducing the cap from 20% to 10%, rather than clearly ordering full abatement.

Q: Was interest waived for hardship?
A: No. Interest remained mandatory until principal was paid.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4, 7-9-3.3, and 7-9-3.5(A)(1) — gross receipts tax on New Mexico services
• Regulation 3.2.1.18(P)(3) NMAC — state-paid child care in a residence is taxable
• NMSA 1978, § 7-1-29(C) — discretionary refund offset
• NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-1-69(A)(1) (2003) — negligence penalty and 10% cap
• NMSA 1978, § 7-1-67 (2007) — mandatory interest
• Regulation 3.1.11.10 NMAC (2001) — definition of negligence
• Regulation 3.1.11.11(D) NMAC — accountant-reliance factor

Cases cited:

• C & D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Phelps Dodge Corp. v. Revenue Division of the Taxation and Revenue Department, 103 N.M. 20, 702 P.2d 10 (Ct. App. 1985)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kimberly and William Flores
• Decision PDF: D&O 10-05

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
KIMBERLY AND WILLIAM FLORES 10-5
TO ASSESSMENTS ISSUED UNDER
LETTER ID NOS. L0160023936 &l0166672768.

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on February 16, 2010, before

Sally Galanter, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Ida Lujan, Special Assistant Attorney General. Ms. Kimberly Flores and Mr.

William Flores (“Taxpayers”) appeared representing themselves. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer, Kimberly Flores, engaged in baby sitting for pay from the State of New

Mexico, CYFD, in the years 2005 and 2006.

2. Taxpayers filed their 2005 personal income tax returns indicating gross receipts of

$5,787.00 on Schedule C of their federal income tax return and no gross receipts on their state

return for the same year. (Department Exhibit A).

3. Taxpayers filed their 2006 personal income tax returns indicating gross receipts of

$4,572.00 on Schedule C of their federal income tax return and no gross receipts on their state

return for the same year. (Department Exhibit B).

4. The tape match system, based on tax information supplied from the Internal

Revenue Service (IRS), revealed the discrepancy between the federal and state tax returns.

5. On July 2, 2008, as a result of the information obtained from the IRS, the

Department mailed to Taxpayers a notice of limited scope audit concerning the discrepancy for

both 2005 and 2006 tax years. (Department Exhibits A & B).

6. Taxpayer, Kimberly Flores, upon receiving the information, went to the

Department office in Albuquerque and spoke with an unknown Department employee who

notified her to wait until she received all documentation from the Department and then file a

protest.

7. The Department sent a Reminder Notice of the Audit to Taxpayers on August 11,

2008 for tax years 2005 and 2006 noting a response requested date of August 31, 2008.

(Department Exhibits A & B).

8. The Department sent a Notice of Potential Assessment to Taxpayers on

September 2, 2008 for tax years 2005 and 2006 noting a response requested date of September

17, 2008. (Department Exhibits A & B).

9. On September 23, 2008, the Department assessed Taxpayers gross receipts tax in

the amount of $365.98 in principal, $73.20 in penalty and $135.17 in interest for a total of

$574.35 for tax period ending December 31, 2005. (Department Exhibit C).

10. On September 23, 2008, the Department assessed Taxpayers gross receipts tax in

the amount of $291.60 in principal, $58.32 in penalty and $63.99 in interest for a total of $413.91

for tax period ending December 31, 2006. (Department Exhibit D).

11. On February 27, 2008, posted to the Department records that day, Taxpayers were

refunded $411.00 as a result of their being no known outstanding tax liability on that date.

(Department Exhibit E).

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12. On August 25, 2008, posted to the Department records on October 20, 2008,

Taxpayers received an income tax rebate of $200.00, and were notified that the rebate was offset

against Taxpayers outstanding tax liability for 2005 reducing the amount of principal tax owed

from $365.98 to $165.98 balance remaining due and owing. (Department Exhibit E).

13. While requesting and being granted an extension of time to file a written protest,

Taxpayers timely filed a written protest to the assessments on December 22, 2008. (Department

Exhibits F, G &H).

14. In the protest letter, Taxpayers protested the assessments and requested that the

offset be refunded to them. (Department Exhibit H).

15. Taxpayer, Ms. Flores, expected her tax preparer to properly take out what taxes

were owed and although knowing Taxpayers owed federal taxes she did not know they owed

taxes to the state on the gross receipts income.

16. Taxpayer, Ms. Flores, attended a class based on her being paid through the state,

CYFD, for the babysitting and was notified by the state that she would be responsible for

payment of taxes as taxes were not being taken out of the funds prior to being paid.

17. The state of New Mexico sent Taxpayers a 1099 form for the income received for

the babysitting services.

DISCUSSION

The primarily issue to be decided is whether Taxpayers are liable for the gross receipts

taxes, civil penalty and continuing interest due to the non-reporting of gross receipts for

babysitting services in the tax periods ending December 2005 and December 2006. An

additional issue is whether Taxpayers are entitled to have the income tax rebate returned to them.

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Taxpayers acknowledge that they probably owe the taxes but seek abatement of penalty and

interest and the return of the income tax rebate. Taxpayers ask to be excused from payment of

penalty and interest as Mr. Flores has been ill and has been out of work for some time and due to

Taxpayers not having the funds to pay what is claimed to be due.

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

by the Department is presumed to be correct. Regulation 3.1.6.12 (A) NMAC explains that once

an assessment is mailed to a taxpayer that the presumption of correctness attaches and that

therefore the taxpayer has the burden with evidence to dispute the correctness. Also NMSA

1978, §7-1-3 NMSA (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). See also, Regulation 3.1.6.13 NMAC. Accordingly, the

presumption of correctness applies to the assessment of principal tax, to the penalty and interest,

and it is Taxpayer’s burden to present evidence and legal argument to establish that they are not

liable for the gross receipts tax and are entitled to an abatement of interest and penalty.

Gross Receipts Tax Due. NMSA 1978, § 7-9-4 (1990) imposes an excise tax on the gross

receipts of any person engaging in business in New Mexico. The definition of “engaging in

business” is very broad including “carrying on or causing to be carried on any activity with the

purpose of direct or indirect benefit.” NMSA, 1978, § 7-9-3.3 (2002). The statute makes no

distinction between activities engaged in by large corporations and activities engaged in by small

“mom and pop” operations.

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Pursuant to NMSA 1978, §7-9-3.5 (A) (1) (2007), gross receipts “means the total amount of

money…received…from performing services in New Mexico.” Specifically Regulation 3.2.1.18 (P)

(3) NMAC states,

Receipts from providing day care for children in a situation where a
person provides day care for children in a residence and the care for
all these children is paid for by the state of New Mexico are subject to
gross receipts tax.

In this case, Taxpayer, Ms. Flores entered into an agreement with CYFD, the State of New

Mexico, to provide babysitting services for her grandchildren in return for the state paying her

compensation for such services. Because this activity is included in “engaging in an activity”

with the result of receiving a monetary benefit and because Taxpayer was performing this service

in New Mexico, providing day care in her residence and being paid by the state, Taxpayers are

liable for gross receipts tax on their income from those services.

Entitlement to Offset. The issue is whether Taxpayers are entitled to return of their

income tax rebate awarded to them and subsequently offset against their tax liability. Taxpayers

are liable for the unpaid taxes on the gross receipts received as a result of babysitting. NMSA

1978, §7-1-29(C) states, “In the discretion of the secretary, any amount of tax to be refunded may

be offset against any amount of tax for which the person due to receive the refund is liable. The

secretary or the secretary’s delegate shall give notice to the taxpayer that the refund will be made

in this manner…” The Department sent Notice of Refund Offset to Taxpayers on November 21,

2008 notifying them that they were entitled to an income tax rebate of $200.00 and that the rebate

had been applied to their outstanding tax liability. The Department applied the rebate to the

principal owed for 2005 gross receipts. (Department Exhibit E). The action by the Department

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was in compliance with the law. Therefore Taxpayers are not entitled to return of their rebate

amount.

Civil Penalty. NMSA 1978, §7-1-69 (2003, prior to amendments through 2007) governs

the imposition of penalty. NMSA 1978 Section 7-1-69 (2003, prior to amendments through 2007), in

effect prior to January 1, 2008 states,

A. Except as provided in Subsection C of this section, in the case of failure due
to negligence or disregard of department rules and regulations, but without intent to
evade or defeat a tax, to pay when due the amount of t ax required to be paid, to pay
in accordance with the provisions of Section 7-1-13.1 NMSA 1978 when required to
do so or to file by the date required a return regardless of whether a tax is due, there
shall be added to the amount assessed a penalty in an amount equal to the greater of:
(1) two percent per month or any fraction of a month from the date the tax was due
multiplied by the amount of tax due but not paid, not to exceed ten percent of the tax
due but not paid.

NMSA 1978 Sec. 7-1-69 (2003, prior to the amendments through 2007) provides that when a

taxpayer fails to pay taxes due to the state as a result of negligence or disregard of rules and

regulations, a penalty “shall be added” to the amount of the underpayment. The term “negligence”

as used in Sec. 7-1-69 is defined in Regulation 3.1.11.10 NMAC (2001) 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.

Whether Taxpayers have acted negligently for purposes of the civil penalty imposed by §7-1-69

(2003, prior to amendments through 2007), is determined as of the date the taxes were due. Taxpayers

had notice of an assessment by the department that taxes were claimed as due. Taxpayers failed to

pursue their objections to the assessment with the ordinary care and prudence that a reasonable

taxpayer would exercise under like circumstances after being notified that taxes were due. Taxpayers

did not act to pursue resolution of the assessment when action was required. Taxpayers completed the

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formal protest (Department Exhibit H) knowing there was a claim for taxes based on non-payment of

gross receipts based on baby sitting funds received from the state. Taxpayers erroneously believed that

they were not liable for any taxes owed to the state based on the gross receipts. This error meets the

definition of negligence set out in Department regulations and in New Mexico case law. See C & D

Trailer Sales v. Taxation and Revenue Dept., 93 N.M. 697, 699, 604 P.2d 835, 837 (Ct. App. 1979)

(a taxpayer's mere belief that he is not liable to pay taxes is tantamount to negligence within the

meaning of the statute); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108

N.M. 795, P.797, 779 P.2d 982, 984 (Ct. App. 1989) (§ 7-1-69 is designed specifically to penalize

unintentional failure to pay tax.).

While Taxpayer, Ms. Flores, testified that Taxpayers had a tax service complete their tax

returns the evidence was insufficient to establish non-negligence pursuant to Regulation 3.3.11.11 (D)

NMAC as there was no evidence that Taxpayers had any specific discussions with the tax preparer

concerning gross receipts taxes owed to the state. Taxpayers did not establish that the failure to pay the

tax was caused by the reasonable reliance on the advice of competent tax counsel or accountant as to

the taxpayer’s liability after full disclosure of all relevant facts as the evidence established that

Taxpayers did not believe that they were liable to any taxes to the state based on the gross receipts from

babysitting.

In the Notice of Limited Scope Audit commencement, the reminder of Notice of Limited

Scope audit, the assessments for the tax years 2005 and 2006, and the acknowledgment letter of

January 23, 2009 from the Department to Taxpayers, the Department notified Taxpayers that penalty

will be assessed at a rate of 2% per month (to a maximum of 20%) on the principal amount of tax

due until such tax is paid. (Department Exhibits A, B, C, D, I and J). Taxpayers certainly, had

sufficient notice that a penalty would be assessed due to non-payment of the principal tax due.

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Imposing a civil penalty on Taxpayer’s liability was correct. The Department’s calculation of

the penalty is not correct. The Department imposed a twenty percent (20%) civil penalty on the

principal of the gross receipts tax. (Department Exhibits C and D). The amount of negligence

penalty added to the underlying principal tax liability by the Department is not in accordance with

the meaning of §7-1-69 (2003, prior to amendments through 2007). §7-1-69 (A)(1) provides that if

the tax required to be paid when due is not paid, the Department may add civil penalty in an amount

“…not to exceed ten percent of the tax due but not paid.” As the effective date of the legislative

change as to the maximum penalty amount capped at 20%, under NMSA 1978, Sec. 7-1-69 (2007),

was January 1, 2008, and the taxes at issue are 2005 and 2006, the total amount of penalty assessed

to taxpayer is determined to be 10% of the principal amount. There was no retroactivity provision

within this statute allowing for an additional civil penalty of ten percent (10%) to be applied to past

due principal tax balances due as of January 1, 2008 that had already exceeded the maximum rate

applied. This determination is based on Phelps Dodge Corp. v. Revenue Division of the Taxation and

Revenue Dept of the State of New Mexico, 103 NM 20, 702 P.2d 10 (Ct. App. 1985), which

following Worman v. Echo Ridge Homes Cooperative, Inc. 98 NM 237, 647 P.2d 870 (982) states,

“new legislation must not alter the clear language of a prior statute if it is to be applied

retroactively.” Additionally, in State v. Padilla, 78 NM 702, 437 P.2d 163 (Ct. App. 1968), affirmed

in Psomas v. Psomas, 99 NM 606, 661 P.2d 884 (1982), the court stated, “it is presumed that statutes

will operate prospectively only, unless an intention on the part of the legislature is clearly apparent to

give them retroactive affect.” See also Karpa v. Commission of Internal Revenue, 909 F.2d 784

(1990) and Bradbury Stamm Construction v. Bureau of Revenue, 70 NM 226, 373 P.2d (1962).

Interest. NMSA 1978, § 7-1-67 (2007) governs the imposition of interest on the late

payments of tax and provides, in pertinent part:

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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... (emphasis
added).

The 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). 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 until such time as the principal tax is paid in full.

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

time value of unpaid revenues. Here, the Taxpayer failed to pay gross receipts tax due to the

state. In effect, the Taxpayer had a loan of state funds during the time taxes were owed but not

paid. Therefore continuing interest is due until such time as the principal tax due is paid. The

statutory rate is mandatorily set by the legislature, and neither the Department nor its hearing

officer has the authority to adjust interest based on the financial or personal situations of

individual taxpayers. See, State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768,

774-775 (the legislature, not the administrative agency, declares the policy and establishes

primary standards to which the agency must conform).

CONCLUSIONS OF LAW

A. The Taxpayers filed a timely, written protest to the assessments of gross receipts tax

issued under Letter ID Nos. L0160023936 and L0166672768, and jurisdiction lies over the parties

and the subject matter of this protest.

B. Taxpayers failed to meet their burden of proving that their income reported on their

2005 and 2006 federal income tax returns for babysitting is not subject to New Mexico gross

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receipts tax. Therefore, the amounts of $5,787.00 and $4,572.00 are subject to New Mexico gross

receipts tax.

C. The Department properly offset Taxpayer’s income tax rebate against their

outstanding 2005 gross receipts tax liability.

D. The amount of civil penalty added to the principal tax shall not exceed ten percent

(10%) as provided in §7-1-69(A)(1)(2003, prior to amendments through 2007) and any amounts

added or assessed in excess of the ten percent (10%) shall be abated.

E. Interest was correctly added and assessed, pursuant to NMSA 1978, §7-1-67, to the

principal amount of tax, and continues to be applied until the principal tax is paid in full.

The Taxpayer was not negligent in failing to report gross receipts tax during the period at issue, and

the negligence penalty imposed pursuant to NMSA 1978, § 7-1-69 should be abated.

For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND DENIED

IN PART: the Department is ordered to abate ten penalty (10%) of the penalty amount for tax years

2005 and 2006 unless it has already done so.

DATED March 24, 2010.

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