Could Steve Ortiz use Type 6 NTTCs obtained after the 60-day audit deadline to deduct 2006 construction and resale-service receipts?

Plain-English summary

Steve Ortiz lost his gross receipts tax deduction because he obtained the required Type 6 nontaxable transaction certificates after the statutory 60-day audit deadline. The later certificates did not cure the failure, and tax plus interest remained due. The negligence penalty applied, but it was reduced from a 20% to a 10% maximum.

Ortiz operated a sole-proprietor restaurant-remodeling business in Albuquerque. In 2006, he performed services for J&R Construction and McComas Restaurant Supply without obtaining NTTCs from either company.

An IRS information match found a difference between the business income on his federal Schedule C and the receipts reported on his New Mexico CRS returns. The final decision identified $61,451 as the difference subject to gross receipts tax.

The audit notice created a firm 60-day deadline

On June 3, 2009, the Department sent Ortiz a limited-scope audit notice. It told him that he had to possess and submit all NTTCs supporting his 2006 deductions within 60 days, by August 2, or the deductions would be disallowed.

The Department sent a reminder on July 13 and then a potential-assessment notice giving him an additional opportunity through August 18.

Ortiz turned the notices over to his accountant without reading them beyond recognizing that they concerned an audit. He relied on the accountant to handle the matter and did not follow up. Only after Department telephone calls in September did the accountant tell him to obtain the certificates.

Ortiz then secured Type 6 NTTCs dated October 13 and October 19, roughly two months after even the extra August deadline.

The late certificates could not restore the deduction

Sections 7-9-48 and 7-9-52 allowed deductions for qualifying resale services and construction services when the buyer delivered an NTTC to the service provider.

Section 7-9-43 said sellers should possess the required certificate when the return was due. It also gave a taxpayer under Department notice a second chance: obtain the certificate within 60 days. If the seller did not possess it by then, the deduction “shall be disallowed.”

The hearing officer treated that language as mandatory. Why the certificate was late did not matter, and the Department had no authority to extend the statutory deadline further. Because Ortiz missed both the 60-day date and the Department's additional opportunity, the October certificates were ineffective for the 2006 deduction.

Tax paid on later transactions was not the same tax

Ortiz argued that the companies receiving his services had charged their own customers and paid gross receipts tax, so assessing him would collect tax twice on the same services.

The decision rejected that argument. Ortiz was responsible for tax on his sale of services to the two companies. Those companies were separately responsible for tax on their own sales to end users. The receipts belonged to different taxpayers and different transactions.

The NTTC system was the statutory mechanism for preventing tax at the intermediate stage. By failing to obtain timely certificates, Ortiz remained subject to the presumption of taxability.

Reliance on the accountant was negligent on these facts

Ortiz received three notices but did not read the requirements, discuss the tax issue specifically with the accountant, or ensure a timely response. Simply leaving the paperwork with the accountant did not show reasonable reliance after full disclosure of the relevant facts.

The decision therefore upheld negligence penalty. It also held, however, that the Department could not apply the later 20% maximum retroactively to a 2006 liability. The penalty was limited to 10%.

Interest remained mandatory until the principal was paid.

Result: protest GRANTED IN PART and DENIED IN PART. The deduction was denied; tax and interest remained; penalty above 10% had to be abated.

What this means for you

Contractors and subcontractors

Obtain the correct NTTC at the time of the transaction whenever possible. The 60-day audit rule is a last opportunity, not an open-ended cure period.

Businesses receiving an NTTC demand

Read the notice immediately, calendar the statutory deadline, contact every customer that must issue a certificate, and verify that the certificates are fully executed and in your possession before time expires.

Business owners delegating an audit response

Delegation does not eliminate your responsibility. Confirm that the adviser understands the precise deadline and requested documents, and follow up until submission is verified.

Common questions

Q: Did Ortiz eventually obtain valid Type 6 NTTCs?
A: Yes, but they were dated and delivered after the statutory deadline.

Q: Could the Department accept the late certificates anyway?
A: No. The decision read Section 7-9-43's “shall be disallowed” language as leaving no discretion.

Q: Why was this not double taxation?
A: Ortiz's receipts from his customers and the customers' receipts from end users were separate transactions earned by different taxpayers.

Q: Did relying on an accountant excuse the late response?
A: No. Ortiz did not read the notices, have specific discussions about the liability, or follow up on the response.

Q: What happened to the penalty?
A: Negligence was upheld, but the maximum was reduced from 20% to 10% for the 2006 liability.

Citations and references

Statutes:

• NMSA 1978, § 7-9-43 (2005) — NTTC possession and mandatory 60-day audit-notice deadline
• NMSA 1978, § 7-9-48 (2000) — service-for-resale deduction with an NTTC
• NMSA 1978, § 7-9-52 (2000) — construction-service deduction with an NTTC
• NMSA 1978, §§ 7-9-4 and 7-9-5 — gross receipts tax and presumption of taxability
• 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

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
• Proficient Food v. New Mexico Taxation and Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988)
• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)
• 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: Steve Ortiz
• Decision PDF: D&O 10-09

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 No. 10-09
STEVE ORTIZ d/b/a STEVE ORTIZ EQUIPMENT AND MECHANICAL
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0371439488

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 8, 2010, before Sally

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

represented by Peter Breen, Special Assistant Attorney General. Mr. Thomas Dillon also appeared

and testified on behalf of the Department. Mr. Steve Ortiz appeared and represented his business

and himself (“Taxpayer”). Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer operates a sole proprietorship restaurant remodeling business in

Albuquerque, New Mexico.

2. In 2006 Taxpayer performed services for J&R Construction and McComas

Restaurant Supply but did not obtain a nontaxable transaction certificate (“NTTC”) from either

company.

3. As part of an information-sharing program with the Internal Revenue Service

(“IRS’) known as the “Tape-Match Program”, the Department was notified of the business

income reported on Schedule C to the Taxpayer’s 2006 Federal income tax return.

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Tax Hearing regarding gross receipts tax
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Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
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4. The Department found a discrepancy between Taxpayer’s Schedule C IRS filing

and Taxpayer’s 2006 New Mexico State Combined Reporting System (“CRS”) returns.

5. On June 3, 2009, the Department sent Taxpayer a notice that it was conducting a

limited scope audit of his 2006 Schedule C Gross Receipts tax reporting because of the mismatch

between Taxpayer’s Schedule C 2006 IRS return and Taxpayer’s 2006 CRS state return.

(Department Exhibit A)

6. The Department mailed the notice to Taxpayer’s acknowledged address, which is

the same address that Taxpayer listed in his letter of protest. (Department Exhibit A)

7. The Department’s notice advised Taxpayer that in order to establish that the gross

receipts were deductible and therefore the gross receipts tax not owed, he must be in possession

of all NTTCs required to support his deductions for 2006 within 60 days from the date of the

notice.

8. The Department’s notice also advised that the NTTCs must be dated no later than

the end of the 60 day period (response date) and if on the response date the NTTCs were not in

his possession and properly executed that the “DEDUCTIONS RELATING TO THE NTTCs

WILL BE DISALLOWED.”

9. The notice also required that the NTTCs be sent to the Department by the

response date, which expired on August 2, 2009. (Department A)

10. The June 3, 2009 notice explained the amount reported on the Schedule C 2006

IRS return and the amount reported on Taxpayer’s 2006 CRS state return. (Department Exhibit

A)

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Tax Hearing regarding gross receipts tax
issued under letter L0371439488
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11. Upon receiving the Department’s notice of limited scope audit for 2006, Taxpayer

turned the notice over to his accountant, Mr. Pete Montoya.

12. Taxpayer relied on his accountant to take all necessary steps to address the limited

scope audit.

13. On July 13, 2009, the Department mailed a reminder notice of limited scope audit

to the same address, again informing Taxpayer that any NTTCs required to support his claimed

deductions for 2006 be executed and in his possession on or before the listed response date of

August 2, 2009 and that failure to so provide the documentation to the Department would result

in the deductions being disallowed. (Taxpayer Exhibit 1)

14. On the August 2, 2009 Taxpayer did not possess the relevant NTTCs for 2006.

15. On August 3, 2009, the Department mailed a notice of potential assessment to the

same address, again informing Taxpayer that the discrepancy between Schedule C 2006 IRS

return and Taxpayer’s 2006 CRS state return remained unresolved and that if the Department did

not receive documentation to support the deductions by August 18, 2009 Taxpayer would be

assessed gross receipts taxes based on the discrepancy. (Taxpayer Exhibit 1)

16. Taxpayer, without reviewing any documentation from the Department other than

to note it concerned an audit, turned all documentation to Mr. Montoya.

17. In September 2009 in response to telephone calls from a Department employee,

Taxpayer met with his accountant. The accountant advised Taxpayer to obtain the relevant

NTTCs from J&R Construction and McComas Restaurant Supply.

18. Taxpayer contacted the two companies and received the requested Type 6 NTTCs

to support the deduction of his receipts for 2006.

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
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19. Taxpayer delivered to the Department the Type 6 NTTC from McComas Sales

Co. Inc dated October 19, 2009 and the Type 6 NTTC from J&R Construction dated October 13,

2009.

20. On October 23, 2009, the Department assessed the Taxpayer for $3,919.32 gross

receipts tax, $783.87 penalty, and $1,062.92 interest for 2006 under letter ID number

L0371439488 for tax year ending December 31, 2006. (Department Exhibit B)

21. By letter received by the Department’s Protest office on November 4, 2009;

Taxpayer timely protested the assessment. (Department Exhibit C)

22. By letter dated November 6, 2009, the Department acknowledged receipt of the protest

and acknowledging Taxpayer’s request for hearing. (Department Exhibit D).

23. On November 17, 2009, Thomas Dillon, CPA, with the Department’s Protest

Office mailed to Taxpayer, at the same address, an acknowledgement of receipt of the NTTCs

and a denial by the Department to allow Taxpayer’s claim of deduction and therefore abate the

assessment as Taxpayer did not possess the NTTCs at the time the services were performed in

2006 and because the Taxpayer did not possess the NTTCs within 60-days of the notice of

limited scope audit for 2006. (Taxpayer Exhibit 1)

DISCUSSION

The primary issue in this case is whether Taxpayer's failure to have the NTTCs from J&R

Construction and from McComas Restaurant Supply in his possession within the 60-day period

provided in the Department's limited audit notice forecloses him from deducting his receipts for

services he performed for the companies in 2006 under NMSA 1978, §7-9-48 (2000) based on

the sale of a service for resale. An additional issue is whether the Department having already
Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 4 of 16
received the gross receipts taxes for the services from the companies supplying the NTTCs amounted

to double taxation when charged to Taxpayer. Taxpayer acknowledges that he should owe a fine

based on the lateness of his obtaining the NTTCs but seeks abatement of the gross receipts tax and

therefore the other charges based on the tax already being paid by other taxpayers. The Department

argues that the Taxpayer is precluded from claiming the deduction under NMSA 1978, §7-9-48

(2000) for 2006 as Taxpayer failed to possess the relevant NTTCs both at the time Taxpayer

rendered the services and within 60-days of the notice of the limited scope audit.

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 of submitting evidence to dispute the correctness. See

Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972). 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 (2001). 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. NMSA 1978, §7-9-4 (1990) imposes an excise tax on the gross

receipts of any person engaging in business in New Mexico. There is a statutory presumption that all

receipts of a persons/entity engaging in business in New Mexico are subject to the gross receipts tax.

NMSA 1978, §7-9-5 (2002). Pursuant to NMSA 1978, §7-9-3.5 (A) (1) (2007), gross receipts
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Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
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“means the total amount of money…received…from performing services 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.

As this protest involves a deduction from the tax, Taxpayer has the burden of overcoming the

assessment by establishing that he was entitled to the deduction pursuant to NMSA 1978, §7-9-48

(2000) for 2006.. In Wing Pawn Shop v. Taxation and Revenue Department, 111 NM 735, 740, 809

P.2d 649, 654 (Ct. App. 1991) ¶29 -32, the court explained,

Where an exemption or deduction from tax is claimed, the statute must be
construed strictly in favor of the taxing authority, the right to the exemption
or deduction must be clearly and unambiguously expressed in the statute, and
the right must be clearly established by the taxpayer…taxation is the rule and
the claimant for an exemption must show that his demand is within the letter
as well as the spirit of the law.

See also Security Escrow Corp. v. Taxation and Revenue Department, 107 NM 540, 543, 760 P.2d

1306, 130 (Ct. App. 1988) §18-20. Where a party claiming a right to a tax deduction fails to follow

the method prescribed by statute or regulation, he waives his right thereto. See Proficient Food v.

New Mexico Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806, 811 (Ct. App.),

cert denied, 107 N.M. 308, 756 P.2d 1203 (1988). The evidence submitted by Taxpayer was

insufficient to overcome the statutory presumption and by failing to follow the method prescribed by

statute, Taxpayer waived his right to claim the deduction.

NTTC Requirement for claimed Deduction. The Gross Receipts and Compensating Tax

Act provides several deductions from gross receipts for taxpayers who meet the statutory

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
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requirements set by the legislature. The Taxpayer is seeking to qualify for the deduction provided

in NMSA 1978, §7-9-52 (2000), which states:

A. Receipts from selling a construction service may be deducted
from gross receipts if the sale is made to a person engaged in the
construction business who delivers a nontaxable transaction certificate
to the person performing the construction service. (emphasis added)

This statute allows a taxpayer to deduct its receipts from performing services as a subcontractor if,

and only if, the general contractor provides the taxpayer with an NTTC. The requirements of

NMSA 1978, §7-9-52 are very specific. If the subcontractor fails to obtain an NTTC from the

general contractor, there is no basis for the deduction.

Also, NMSA 1978, §7-9-48 (2000) states,

Receipts from selling a service for resale may be deducted from
gross receipts ...if the sale is made to a person who delivers a
nontaxable transaction certificate to the seller....

This statute also allows a taxpayer to deduct its receipts from performing services if the seller

claiming the deduction receives a NTTC from the buyer of that seller’s service at the time of the

sale or transaction. The provisions of NMSA 1978, §7-9-48 are also very specific. If the seller fails

to obtain a NTTC from the buyer of the service, there is no basis for the deduction.

The requirements for obtaining NTTCs are set out in NMSA 1978, §7-9-43 (2005), which

provides:

All nontaxable transaction certificates...should be in the possession of
the seller or lessor for nontaxable transactions at the time the return is
due for receipts from the transactions. If the seller or lessor is not in
possession of the required nontaxable transaction certificates within
sixty days from the date that the notice requiring possession of these
nontaxable transaction certificates is given the seller or lessor by the
department, deductions claimed by the seller or lessor that require

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 7 of 16
delivery of these nontaxable transaction certificates shall be
disallowed.

While taxpayers “should” have possession of required NTTCs at the time of the transaction at issue,

the statute provides taxpayers audited by the Department a second chance to obtain these NTTCs.

Taxpayers who rely on this provision must recognize, however, that they run the risk of having their

deductions disallowed if they are unable to meet the 60-day deadline set by the legislature. The

reason why a taxpayer does not obtain an NTTC is irrelevant. The language of the statute is

mandatory: if a seller is not in possession of required NTTCs within 60 days from the date of the

Department's notice, "deductions claimed by the seller ... that require delivery of these nontaxable

transaction certificates shall be disallowed." (emphasis added).

Taxpayer failed to possess NTTCs by deadlines allowed by the Department. Taxpayer

questioned whether or not he received all notifications from the Department as to the necessity of

obtaining the NTTCs and supplying them to the Department. The evidence established that all

documentation sent by the Department to Taxpayer was mailed to Taxpayer’s acknowledged

address. Additionally, Taxpayer’s exhibit 1 established that he received the reminder of limited

scope audit, the notice of potential assessment and the denial of deduction based on untimely

submission of the NTTCs. While Taxpayer obtained the proper NTTCs from J&R Construction and

McComas Restaurant Supply and did submit them to the Department, Taxpayer did not obtain the

NTTCs until well over two months after the August 2, 2009 deadline. Additionally, the Department

provided Taxpayer a third opportunity to submit the necessary NTTCs to avoid an assessment for

gross receipts taxes in its notice of potential assessment allowing Taxpayer through August 18, 2009

to provide the necessary documentation. Taxpayer actually obtained the NTTC from McComas

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 8 of 16
Restaurant Supply approximately two months after the August 18th deadline and obtained the NTTC

from J&R Construction just short of two months after this deadline.

The 60-day statutory deadline and the additional extension allowed in the notice of potential

assessment for Taxpayer to obtain the NTTCs, after notice of the limited audit, served as Taxpayer’s

statutory extension to obtain the NTTCs that he should have already possessed at the time of the

work being completed by him. Regardless of his reasoning for the non-possession of a required

NTTC, NMSA 1978, §7-9-43 (2005) provides no further extension of time. The fact that the

Department allowed a third opportunity to submit the NTTCs does not negate the mandatory

language of NMSA 1978, §7-9-43 (2005), which requires that the deduction “shall be disallowed”

and does not allow the Department any leeway in granting a deduction in instances of untimely

possession of a required NTTC.

While Taxpayer relied on his accountant to respond to the Department’s request for

documentation, ultimately it was Taxpayer’s responsibility to ensure that he complied with his

statutory tax obligations by obtaining the proper NTTCs to support his claim for a deduction for

services rendered by him. Every person is charged with the reasonable duty to ascertain the possible

tax consequences of his actions. Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558

P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). The incidence of the

gross receipts tax is on the seller, and it was the responsibility of Taxpayer to timely respond to the

Department’s letters and to determine whether he had the documentation needed to support his

claim of deductions. The Taxpayer’s failure to obtain the NTTCs within the 60-day period provided

in NMSA 1978, §7-9-43 (2005) leaves the Department no choice but to disallow his deductions.

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 9 of 16
Double Taxation. Taxpayer argues that the taxes had properly been paid to the Department by the

end users of his services and that it is inherently wrong for the Department to collect taxes twice for

the same services and that therefore he should not be charged for a tax that had already been paid.

New Mexico courts have held that there is no prohibition against double taxation. See New

Mexico State Board of Public Accountancy v, Grant, 61 NM 287, 299 P.2d 464 (1956); Amarillo-

Pecos Valley Truck Line, Inc. V. Gallegos, 44 NM 120, 99 P.2d 447 (1940) and State ex rel. Attorney

General v. Tittmann, 42 NM 76, 75 P.2d 702 (1938). See also Ft. Smith Lumber Co. v. Arkansas,

251 U.S. 532 (1920). Further, New Mexico courts in construing the New Mexico Gross Receipts and

Compensating Tax Act have held that there is no double taxation where the two taxes complained of

are imposed on the receipts of different taxpayers. See House of Carpets, Inc. v. Bureau of Revenue,

87 NM 747, 507 P.2d 1078 (Ct. App. 1973) and New Mexico Sheriffs v. Police Association v. Bureau

of Revenue, 85 NM 565, 514 P.2d 616 (Ct. App. 1973). In New Mexico Sheriffs the court determined

that “if there were double taxation, such would not necessarily be arbitrary and capricious” and

further that there was no double taxation as the tax was being paid by two different taxpayers not by

one taxpayer paying tax twice on the same items.

When an individual/company sells services to another, the seller is the entity liable for the

gross receipts tax on the sale. The buyer has no obligation to report or pay tax on the seller’s receipts.

When the buyer charges its clients, here the ultimate users of the services, the buyer is the entity

liable for gross receipts on those transactions – neither the seller of the original services nor the

ultimate user has any obligation to report or pay tax on the buyer’s receipts. Although the practice is

for a buyer to pass the cost of the gross receipts tax to the ultimate user, it does not change the

responsibility for the tax. The seller remains responsible to the state for payment of the tax on the

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 10 of 16
sale of his services and the buyer is responsible to the state for payment of the tax on the sale of its

services except if the service provider legally obtains the necessary NTTCs

Recognizing the responsibility and problems inherent in the taxing of transactions when

ownership passes, the legislature has provided a number of statutory deductions from gross receipt

tax. NMSA 1978, §7-9-48 allows under certain prescribed conditions, a deduction for the sale of

services for resale. Taxpayer when selling services for resale as opposed to using the items in the

performance of its own services is eligible to obtain NTTCs from his buyers. Timely obtaining the

NTTCs from his buyers would enable Taxpayer to deduct from the sale of services those services

covered by the NTTCs and eliminate the gross receipts tax on these sales. The legislature has

provided the means for the tax to be assessed one time, namely by using nontaxable transaction

certificates. By not having availed himself of the means for avoiding the tax in question, Taxpayer is

left with the presumption of taxability.

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

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 11 of 16
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 Taxpayer 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. Taxpayer had

notice of the limited scope audit, of the necessity of obtaining NTTCs to claim a deduction of gross

receipts taxes. Taxpayer had a subsequent reminder notice of the audit and the conditions for

disallowance of a requested deduction. Taxpayer also had a third notice explaining that without

additional documentation within the time period that an assessment would be issued. Taxpayer failed to

pursue obtaining and submitting the necessary NTTCs with the ordinary care and prudence that a

reasonable taxpayer would exercise under like circumstances after being notified of the audit and the

potential responsibility for payment of gross receipts taxes. Taxpayer did not act to pursue resolution of

the request for NTTCs when action was required. Taxpayer completed the formal protest (Department

Exhibit C) knowing there was a claim for taxes based on non-payment of gross receipts for failure to

timely submit NTTCs to obtain a deduction. Taxpayer erroneously did not read the documentation sent

by the Department and believed that by turning it over to his accountant that he had no further

responsibility and that his accountant would take care of the matter. This action meets the definition of

negligence set out in Department regulations and in New Mexico case law. See 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.).

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 12 of 16
While Taxpayer testified that he relied on his accountant to take care of the audit, the evidence

was insufficient to establish non-negligence on the part of Taxpayer pursuant to Regulation 3.3.11.11

(D) NMAC. There is no evidence that Taxpayer had any specific discussions with his accountant

concerning gross receipts taxes owed to the state. Other than leaving the paperwork with the accountant,

Taxpayer did not pursue a finalization of the audit. Taxpayer did not establish that the failure to timely

respond to the request for NTTCs 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 Taxpayer did not read the documentation sent by the Department and did not

pursue a timely response to the Department’s requests.

In the assessment for the tax year 2006 and the acknowledgment letter of November 6, 2009

from the Department to Taxpayer, the Department notified Taxpayer 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 B and D) Taxpayer certainly, had sufficient notice that a penalty would

be assessed due to non-payment of the principal tax due.

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

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

the principal of the gross receipts tax. (Department Exhibit B). The amount of negligence penalty

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

meaning of NMSA 1978, §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, §7-

1-69 (2007), was January 1, 2008, and the taxes at issue are 2006, the total amount of penalty

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 13 of 16
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.” In Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993) the

New Mexico Supreme Court declined to retroactively apply a modified penalty regulation enacted

after the applicable tax year. 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). The

statute does not express the intent by the Legislature to apply the 2008 amendment to the statute

retroactively. Therefore in the absence of such intent by the Legislature, the statute operates

prospectively only.

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

payments of tax and provides, in pertinent part:

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).
Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 14 of 16
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

1. Taxpayer filed a timely, written protest to the assessment of gross receipts tax issued under

Letter ID No. L0371439488 and jurisdiction lies over the parties and the subject matter of this

protest.

2. Taxpayer failed to meet his burden of proving that his income reported on Schedule C of his

2006 Federal income tax return is not subject to New Mexico gross receipts tax; accordingly, the

amount of $61,451.00, being the difference between what was reported on his schedule C federal

tax return and on his New Mexico CRS state return, is subject to New Mexico gross receipts tax.

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 15 of 16

3. 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%) should be abated.

4. Interest was correctly added and assessed to the principal amount of tax, and continues to

accrue until the principal tax is paid in full.

For the foregoing reasons, the Taxpayers’ protest IS GRANTED IN PART AND

DENIED IN PART: The Department is ordered to abate ten percent (10%) of the penalty

amount for tax year 2006 unless it has already done so.

DATED: June 16, 2010.

Decision and Order
Tax Hearing regarding gross receipts tax
issued under letter L0371439488
Steve Ortiz d/b/a Steve Ortiz Equipment & Mechanical
Page 16 of 16