Did Christopher Martin owe gross receipts tax, penalty, and interest on handyman work when neither he nor his California tax preparer knew New Mexico taxed the services?

Plain-English summary

Christopher Martin owed gross receipts tax, negligence penalty, and interest on handyman services performed in New Mexico during 2005 and 2006. Neither he nor his California tax preparer knew that the tax applied, but shared ignorance was not reasonable reliance on actual professional advice. The penalties were nevertheless reduced from a 20% to a 10% cap.

Martin worked as a handyman and performed odd jobs in New Mexico. He filed no gross receipts tax reports for 2005 or 2006.

A mismatch between his federal Schedule C and New Mexico CRS information led to two June 30, 2009 assessments:

• For 2005: $3,493.10 tax, $698.62 penalty, and $1,424.35 interest.
• For 2006: $3,140.18 tax, $628.04 penalty, and $812.37 interest.

Martin did not dispute that he had performed services or that the receipts were taxable. He explained that he had not intended to cheat the state, was willing to pay what he owed, and acted to bring later years into compliance once he learned about the requirement.

Handyman services were taxable gross receipts

The cited regulation subjected services performed in New Mexico to gross receipts tax. Martin's handyman work fell within that rule.

New Mexico's self-reporting system placed the duty to learn, report, and pay the tax on the person conducting the business. The fact that the Department did not identify the discrepancy until 2009 did not transfer that responsibility.

Shared ignorance was not accountant-reliance relief

Martin argued that he had used a tax preparer in California and that neither of them knew New Mexico imposed gross receipts tax on services.

The nonnegligence rule protected reasonable reliance on a competent accountant's advice after full disclosure of relevant facts. But the evidence did not show that Martin and the preparer had ever discussed whether gross receipts tax applied before the assessment.

The hearing officer distinguished actual advice from mutual lack of knowledge. The failure was caused by both people being unaware of the tax, not by Martin following a considered professional opinion on the issue. Negligence penalty therefore applied.

The penalty cap was 10%, not 20%

The Department used the 20% maximum that became effective in 2008. The liabilities, however, arose in 2005 and 2006, when the applicable maximum was 10%, and the earlier cap had been exhausted before the amendment took effect.

Without legislative intent for retroactive application, the decision limited each penalty to 10%:

• The 2005 penalty was reduced to $349.31.
• The 2006 penalty was reduced to $314.02.

Interest and the assessment timing were upheld

Interest was mandatory from the day after tax became due and continued while principal remained unpaid. Honest intent and later compliance did not authorize waiver.

The assessments were also timely. Because Martin filed no gross receipts returns for those years, Section 7-1-18(C) allowed the Department seven years from the end of the year in which tax was due to assess.

A managed audit was not available for the assessed years

Martin wanted to use a managed audit for 2005 and 2006, as he had for later periods. Section 7-1-11.1 made managed-audit agreements discretionary with the Secretary or delegate, and the Department did not allow them for periods already assessed.

Result: protest GRANTED IN PART and DENIED IN PART. Tax and interest were upheld; negligence remained; only the penalty amounts were reduced to the 10% cap.

What this means for you

Handymen and other independent service providers

New Mexico gross receipts tax can apply to service income even when the business is small and the work is reported on federal Schedule C. Confirm state filing duties separately from federal income-tax preparation.

Businesses using an out-of-state preparer

Ask directly about New Mexico gross receipts tax and document the answer. A preparer's silence or lack of awareness is not the same as reasoned advice after full disclosure.

Taxpayers considering a managed audit

Seek the agreement before an assessment is issued. The program was discretionary and did not reopen already assessed years in this case.

Common questions

Q: Were Martin's handyman receipts taxable?
A: Yes. They came from services performed in New Mexico.

Q: Did using a California tax preparer eliminate negligence?
A: No. The tax issue had not been discussed, so there was no actual advice on which Martin relied.

Q: Why were the penalties reduced?
A: The 2005 and 2006 liabilities were governed by the former 10% maximum rather than the later 20% cap.

Q: Could the older years be handled through a managed audit?
A: No. The Department did not permit a managed audit for periods that had already been assessed.

Q: Was interest waived because he acted promptly after learning about the tax?
A: No. Interest was mandatory while principal remained unpaid.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-13 — taxpayer's duty to determine and report liability
• NMSA 1978, § 7-1-69 (2003 and 2008 versions) — negligence penalty and change from a 10% to 20% cap
• NMSA 1978, § 7-1-67(A) — mandatory interest
• NMSA 1978, § 7-1-18(C) — seven-year nonfiler assessment period
• NMSA 1978, § 7-1-11.1 and (E) — managed-audit authority and discretion
• Regulation 3.2.1.18(A) NMAC (2003) — New Mexico services subject to gross receipts tax
• Regulation 3.1.11.11(D) NMAC (2001) — reasonable reliance on a competent accountant

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• C & D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Christopher Martin
• Decision PDF: D&O 10-08

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
CHRISTOPHER MARTIN No. 10-08
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0038227328 and L0589976960

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 13, 2010, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Mr. Peter Breen, Special Assistant Attorney General. Mr. Tom Dillon, Auditor,

also appeared on behalf of the Department. Ms. Lisa Perry and Ms. Amiee Rivera appeared as

interpreters for Mr. Dillon. Mr. Christopher Martin (“Taxpayer”) appeared for the hearing and

represented himself. The Hearing Officer took notice of all documents in the administrative file.

The parties agreed to waive the 30-day limit on the decision. Taxpayer was granted until May 7,

2010 to provide an affidavit from his tax preparer. The Department was granted until May 14,

2010 to respond to any items submitted by Taxpayer after the hearing. The Taxpayer submitted

Taxpayer “A”, a letter dated 4/19/10; and Taxpayer “B”, an affidavit from FWH Financial after

the hearing. They were submitted timely. Copies were forwarded to Mr. Breen. The

Department did not respond to the documents. Based on the evidence and arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer was engaged in business in New Mexico as a handyman and doing odd jobs in

2005 and 2006.

2. Taxpayer failed to file gross receipts tax with the Department for 2005 and 2006.
3. The Department determined that Taxpayer was a non-filer on gross receipts tax for 2005

and 2006 through the Schedule C of his federal tax form, which was reported to the

Department as a mismatch through the Combined Reporting System.

4. On June 30, 2009, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period ending on December 31, 2005. The assessment was for

$3,493.10 tax, $698.62 penalty, and $1,424.35 interest.

5. On June 30, 2009, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period ending on December 31, 2006. The assessment was for

$3,140.18 tax, $628.04 penalty, and $812.37 interest.

6. On July 31, 2009, Taxpayer filed a request for extension of time to file protest and a letter

indicating his intent to protest.

7. On August 17, 2009, the Department granted an extension of time to file until September

28, 2009.

8. On September 19, 2009, Taxpayer filed a formal protest letter.

9. On November 23, 2009, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

10. Taxpayer was using a tax preparer from California. Taxpayer and his tax preparer did not

realize that gross receipts tax applied to services rendered in the State of New Mexico.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax, penalty,

and interest for the tax periods ending in December 2005 and December 2006, due to his failure

to file gross receipts tax reports.

Burden of Proof.

In the Matter of Christopher Martin, page 2 of 6
Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17. Tax

includes, by definition, the amount of tax principal imposed and, unless the context otherwise

requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, § 7-1-3. See

also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779

P.2d 982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is presumed to be

correct, and it is the Taxpayer’s burden to present evidence and legal argument to show that he is

not liable for the tax and is entitled to an abatement of penalty and interest.

Gross Receipts Tax.

Services performed within the State of New Mexico are subject to the gross receipts tax. See

3.2.1.18 (A) NMAC (2003). Taxpayer’s handyman services are subject to the gross receipts tax.

It is the responsibility of the taxpayer, who is in the position to know the details of his business

activities, to determine accurately and to report his tax liabilities to the Department. See NMSA

1978, § 7-1-13. At the hearing Taxpayer did not dispute that he was providing services and that

the receipts from the services were taxable. Taxpayer did not deliberately or maliciously fail to

pay his taxes. Taxpayer testified that he is willing to pay the taxes that he owes, and has engaged

in managed audits for the tax years subsequent to 2006. Once Taxpayer realized that he was

required to pay gross receipts for his business, he immediately acted to get his filing into

compliance

Assessment of Penalty.

Taxpayer argues that the Department should be precluded from collecting penalty and interest on

the gross receipts tax for 2005 and 2006, because it should have known of the discrepancy prior

to 2009 and should have notified him of his obligation in a timelier manner. Taxpayer also

argued that the Department should allow him to engage in a managed audit for 2005 and 2006,

In the Matter of Christopher Martin, page 3 of 6
which would allow him to avoid the penalty and interest. A taxpayer’s lack of knowledge or

erroneous belief that the taxpayer did not owe tax is considered to be negligence for purposes of

assessment of penalty. See Tiffany Const. Co., Inc. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d

1155 (Ct. App. 1976). However, when a taxpayer’s belief is based on the advice of a competent

accountant, the taxpayer is not negligent and application of penalty is inappropriate. See C&D

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

burden is on the taxpayer to prove that a failure to pay a tax or to file a return was caused by

reasonable reliance on the advice of a competent accountant after a full disclosure of all relevant

facts. See 3.1.11.11 (D) NMAC (2001). Although it is clear from Taxpayer’s testimony and

from Taxpayer “B” that Taxpayer’s accountant did not know of the gross receipts tax

requirement, there is no evidence that the possibility of the tax was ever discussed prior to the

assessment. Therefore, the failure to pay and to file was not caused by reliance on advice on that

subject; rather, it was caused by ignorance on the part of both Taxpayer and his accountant.

Therefore, the exception does not apply, and the penalty was properly assessed.

Computation of Penalty.

On both of the assessments issued in this matter, the Department seeks to impose a penalty of up

to 20% under NMSA 1978, § 7-1-69 (2008). The assessments were issued for taxes due in 2005

and 2006. The applicable penalty statute in effect for both 2005 and 2006 was capped at a

maximum penalty of 10%. See NMSA 1978, § 7-1-69 (2003). At a maximum penalty of 10%, the

penalty provision had been exhausted for both 2005 and 2006 before the January 1, 2008 effective

date of NMSA 1978, Section 7-1-69 (2008). Mr. Dillon testified that the Department had assessed

a 20% cap because the date that the assessments were issued was after the effective date of the 2008

amendment. Mr. Dillon also explained that even applying a 20% cap, the penalty would have been

In the Matter of Christopher Martin, page 4 of 6
exhausted for 2005 and 2006 before the 2008 amendment went into effect. Without evidence of

legislative intent for retroactive application of NMSA 1978, Section 7-1-69 (2008), the outstanding

tax due for tax years 2005 and 2006 were subject to the 10% penalty cap pursuant to NMSA 1978,

Section 7-1-69 (2003). See Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993)

(holding that a modified penalty regulation would not apply retroactively when the regulation was

enacted after the applicable tax year).

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is due.

NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

mandatory, not discretionary. See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977).

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

time value of unpaid revenues. Because the gross receipts tax was not paid when it was due,

interest was properly assessed. Taxpayer was advised at the hearing that while the tax principal

remains unpaid, the interest will continue to accrue.

Timeliness of Assessment.

The Department has seven years from the end of the year in which the tax is due to make an

assessment when the taxpayer failed to file any return. See NMSA 1978, § 7-1-18 (C). Although

Taxpayer feels that the Department should have known that he owed the liability earlier, the

statute governs the timeliness of an assessment. Taxpayer was assessed in 2009 for the 2005 and

2006 tax years. Therefore, the assessment was made in a timely manner. See id. Although it

clear that Taxpayer is an honest person who did not intend to cheat the State, it is also clear that

Taxpayer owed gross receipts tax for 2005 and 2006 and is required to pay penalty and interest

on the amount due.

In the Matter of Christopher Martin, page 5 of 6
Managed Audits.

The Department may enter into managed audit agreements with taxpayers, which would allow

the taxpayer to avoid penalty and interest. See NMSA 1978, § 7-1-11.1. Managed audits are

entered into solely at the discretion of the secretary or his/her delegate. See NMSA 1978, § 7-1-

11.1 (E). The Department does not allow managed audits for periods of time that have already

been assessed. The Department pointed out that Taxpayer was able to engage in managed audits

for other tax years because the assessments for 2005 and 2006 put Taxpayer on notice of his

obligations for subsequent tax years.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely written protest to the Notice of Assessment of 2005 and

2006 gross receipts taxes issued under respective Letter ID numbers L0038227328 and

L0589976960, and jurisdiction lies over the parties and the subject matter of this protest.

2. Taxpayer was properly assessed for gross receipts tax and interest for 2005 and

2006.

3. The assessment of penalty for 2005 and 2006 is capped at a maximum of 10%.

Therefore, the penalty owed on the assessment in L0038227328 for 2005 is reduced to $349.31, and

the penalty owed on the assessment in L0589976960 for 2006 is reduced to $314.02.

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

IN PART.

DATED: June 2, 2010.

In the Matter of Christopher Martin, page 6 of 6