Could New Mexico apply its new 20% negligence-penalty cap to GEA's pre-2008 gross receipts tax liabilities when assessment occurred after the amendment?

Plain-English summary

D&O 10-13 held that New Mexico could use the new 20% negligence-penalty cap for GEA's pre-2008 gross receipts tax liabilities because the tax was self-assessed and formally assessed after the amendment took effect. On that reasoning, the Department's application of the higher ceiling was prospective, not retroactive.

This holding did not remain an uncontested administrative view. Later D&O 10-19 involving Terry and Eva Capehart expressly rejected D&O 10-13's assessment-date reasoning and held that the law in effect as penalty accrued from the tax due date controlled. The decisions themselves stated that administrative D&Os carried no binding precedential weight. Readers should treat D&O 10-13 as one side of a documented agency-level conflict, not as a settled general rule.

GEA reported and paid after the audit began

GEA was a Colorado company that built and renovated power-plant cooling towers. During the June 2003 through May 2008 audit period, it performed turnkey engineering, design, and construction work for Public Service Company of New Mexico at New Mexico sites.

The Department began its audit on July 16, 2008. On August 22, after the audit started, GEA reported and paid $519,622.42 of gross receipts tax.

The Department's September 21, 2009 assessment stated $587,068.34 of tax, $117,413.66 of penalty, and $137,310.93 of interest, totaling $841,792.93. After offsets, the Department determined that $31,456.55 of principal remained; GEA paid that amount on January 6, 2010.

All issues except the penalty ceiling were withdrawn.

The disputed liabilities had already reached the old 10% cap

GEA had accrued $490,802.60 of tax liabilities over reporting periods from June 1, 2006 through July 1, 2007. At 2% per month, those liabilities had reached the former 10% maximum before January 1, 2008.

On that date, an amendment raised the maximum to 20%. The Department then resumed adding penalty at 2% per month for five more months until the new ceiling was reached.

GEA argued that applying the higher limit to tax periods predating the amendment was retroactive. It relied on D&O 09-02 and D&O 09-05, which had used the tax due date and limited similar liabilities to 10%.

This hearing officer treated assessment as the imposition event

D&O 10-13 disagreed with those earlier decisions. It focused on Section 7-1-69's direction that penalty “shall be added to the amount assessed” and Section 7-1-17(B)'s rules for when an assessment becomes effective.

The hearing officer reasoned that penalty could be imposed only after the taxpayer filed a return showing liability or the Department issued an assessment. Until then, the amount of unpaid tax needed to calculate penalty had not been determined.

GEA did not report the disputed tax before 2008. Its possible self-assessment occurred with the August 22, 2008 filing and payment, and the Department's assessment followed in September 2009. Both events occurred after the amended cap became effective.

The decision therefore held that the 20% ceiling was being applied under the law then in effect, even though the underlying nonpayment began earlier. It analogized the result to cases applying a new interest rate or benefit limitation only after the new provision's effective date while considering facts that arose before it.

Result in D&O 10-13: protest DENIED. The 20% maximum was upheld.

Later D&O 10-19 rejected this analysis

D&O 10-19 later said that D&O 10-13 ignored the same statute's requirement to calculate penalty at 2% per month from the date tax was due and its “not to exceed” cap. That later decision treated the prior 10% maximum as exhausted before 2008 and declined to restart accrual after the amendment.

The two decisions demonstrate why another taxpayer should not rely on D&O 10-13 alone, especially without checking later law and agency or court authority.

What this means for you

Taxpayers researching historical penalty disputes

Identify both the tax due date and the date of any return or Department assessment. D&O 10-13 treated the latter as controlling, but later D&O 10-19 expressly disagreed.

Businesses correcting tax after an audit starts

A post-audit filing can count as a self-assessment under this decision's reasoning. The timing of voluntary reporting may therefore affect how an agency characterizes the applicable penalty law, though this particular analysis was later disputed.

Tax professionals citing administrative decisions

Search for later decisions addressing the same issue. These D&Os were not binding precedent, and the published record contains directly conflicting interpretations.

Common questions

Q: What was the only issue left for decision?
A: Whether the 20% cap could apply to GEA's pre-January 1, 2008 tax liabilities that remained unpaid and were assessed later.

Q: Why did D&O 10-13 uphold the higher cap?
A: It held that penalty was imposed when liability was self-assessed or formally assessed, both of which occurred after the amendment.

Q: Did the decision find an express retroactivity clause?
A: No. It held that no retroactive application occurred at all.

Q: Did later administrative authority agree?
A: No. D&O 10-19 expressly rejected the assessment-date analysis and applied the earlier cap based on accrual from the due date.

Q: Was GEA's protest granted?
A: No. It was denied.

Citations and references

Statutes:

• NMSA 1978, § 7-1-69(A)(1)-(2), as amended by Laws 2007, ch. 45, § 4 — negligence penalty and 20% maximum
• Laws 2007, ch. 45, § 16 — January 1, 2008 effective date
• NMSA 1978, § 7-1-17(B) — effective assessments
• NMSA 1978, § 7-1-3(X) — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-67, as amended by Laws 2007, ch. 45, § 2 — interest-rate amendment described in the stipulation

Cases and administrative decisions discussed:

• State v. Padilla, 78 N.M. 702, 437 P.2d 163 (Ct. App. 1968)
• Bradbury & Stamm Construction Co. v. Bureau of Revenue, 70 N.M. 226, 372 P.2d 808 (1962)
• Howell v. Heim, 118 N.M. 500, 882 P.2d 541 (1994)
• D&O 09-02, In the Matter of the Protest of Alamo True Value Home Center
• D&O 09-05, In the Matter of the Protest of Maria and Robert Cloutier
• Later contrary decision: D&O 10-19, In the Matter of the Protest of Terry and Eva Capehart

Source

• Listing: New Mexico Decisions & Orders
• Decision post: GEA Integrated Cooling Technology
• Decision PDF: D&O 10-13

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. 10-13
GEA INTEGRATED COOLING TECHNOLOGY
NM CRS ID. NO. 02-330522-003
PROTEST TO ASSESSMENT ISSUED
UNDER LETTER ID. NO. 1178774912

DECISION AND ORDER

This matter came on for determination before Gerald B. Richardson, Hearing
Officer, upon a Joint Stipulation of Facts, and the briefs of the parties, and the matter was
considered submitted for determination upon the filing of the briefs on Sept. 21, 2010.
The Taxation and Revenue Department ("Department") was represented by Peter Breen,
Special Assistant Attorney General. GEA Integrated Cooling Technology ("Taxpayer")
was represented by Adam W. Chase, Esq. Based upon the stipulated facts and the
arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer is a Colorado based company that builds and renovates cooling
   towers for power plants.
2. During the audit period, June 30, 2003 to May 31, 2008, the Taxpayer was
   engaged to work on projects by Public Service Company of New Mexico at sites in New
   Mexico. The work was turnkey engineering, design and building of air cooling towers
   for power plants. The materials used were manufactured to the Taxpayer's specifications
   by out-of-state manufacturers and then delivered to the New Mexico work site for
   incorporation into the construction project.
3. The Department began an audit of the taxpayer on July 16, 2008 for tax
   periods beginning June 30, 2003 and ending on May 31, 2008. After the audit started,
   GEA reported $519,622.42 in gross receipts taxes and submitted payment of that amount
   on August 22, 2008.

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4. On September 21, 2009, the Department issued as assessment to the
   Taxpayer for the audit period in the amount of $841,792.93, representing $587,068.34 in
   gross receipts tax, $117,413.66 penalty and $137,310.93 interest.
5. After allowing offsets in the amount of $35,989.37, the Department
   ultimately determined that Taxpayer still owed $31,456.55 in tax principal. Taxpayer
   paid that tax principal on January 6, 2010.
6. The Department determined the amount of penalty as follows. The
   Taxpayer had accrued $490,802.60 in tax liabilities over various tax periods between
   June 1, 2006 and July 1, 2007. The applicable 10% limit on the accrual of penalty at 2%
   per month on that unpaid tax had been reached before January 1, 2008 for all tax owed
   during that period. On January 1, 2008, the amendment to Section 7-1-69(A) NMSA
   1978 became effective, raising the limit on the accrual of penalty from 10% to 20%.
   After that effective date, the Department resumed adding penalty in the amount of 2% per
   month for five months until the new maximum of 20% was reached on the unpaid tax
   liabilities accrued during periods prior to January 1, 2008.
7. After the effective date of the amendment to Section 7-1-69(A) NMSA
   1978, increasing the maximum penalty to 20%, the Taxpayer accrued additional gross
   receipts tax liabilities in the amounts of $23,703.64 in February 2008, $2,182.13 in
   March 2008 and $34,387.60 in April 2008. The Taxpayer and the department agree that
   the 20% limitation on penalty applied to the unpaid portion of the post-January 1, 2008
   tax liability.
8. The Department assessed interest at 15% simple interest rate on the
   principal amount of the tax due up through January 1, 2008. For the period after January
   1, 2008, the Department assessed interest at the lower interest rate on the unpaid balance
   of tax owed as set pursuant to the amendment to the statute imposing interest on unpaid
   tax liabilities, Section 7-1-67 NMSA 1978, as amended in Laws 2007, ch. 45, § 2.
9. The sole issue for determination in this protest is whether the Department
   correctly applied the increase in the maximum penalty limitation from 10% to 20%
   pursuant to Section 7-1-69(A)(1) and (2) NMSA 1978, as amended by Laws 2007, ch.
   45, § 4, to the Taxpayer's tax liabilities accrued prior to January 1, 2008 but not paid until
   after that date. All other issued raised in the Taxpayer's protest have been withdrawn.

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DISCUSSION
The only issue remaining to be determined in this matter is whether the
Department properly assessed penalty at the maximum rate of 20% of the underlying
gross receipts tax liability assessed against the Taxpayer for reporting periods between
June 1, 2006 and July 1, 2007. This question arises because Section 7-1-69(A) NMSA
1978, the statutory provision governing the imposition of penalty when tax is not paid
when due, was amended by Laws 2007, ch. 45, § 4, to raise the maximum penalty which
can be imposed from 10% of the unpaid tax to 20% of the unpaid tax. The amendment
became effective on January 1, 2008. Laws 2007, ch. 45, § 16.
Essentially, the Taxpayer argues that because the tax periods for which tax was
not paid when due occurred prior to the effective date of the statutory amendments
raising the maximum amount of penalty which could be imposed, that the prior version of
the statute, which limited penalty to a maximum of 10% should apply. Taxpayer argues
that to apply the later version of the statute would amount to giving the amended statute
retroactive effect. Both parties agree that statutes are presumed to operate prospectively
only, unless an intention on the part of the legislature is clearly apparent to give them
retroactive effect. See, State v. Padilla, 78 N.M. 702, 703, 437 P.2d 163, 164 (Ct. App.
1968). The Department does not argue that there is anything in the legislative record to
indicate that the statutory amendment was intended to operate retroactively. Rather, it
argues that it is not applying the amended statute retroactively. It is simply applying the
version of the statute which is applicable under the circumstances.
Section 7-1-69(A) NMSA 1978 is the statute governing the imposition of penalty
in this matter. I will set forth, in pertinent part, the language as amended by Laws 2007,
ch. 45, § 4, which was identical to the language of the prior version, save the increase in
the maximum amount of penalty to 20% from the prior maximum of 10%.
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
tax required to be paid, ...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:

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(1) two percent per month or any fraction of a month from the date
when the tax was due multiplied by the amount of tax due but not paid, not
to exceed twenty percent of the tax due but not paid;
(2) two percent per month or any fraction of a month from the date
the return was required to be filed multiplied by the tax liability
established in the late return, not to exceed twenty percent of the tax
liability established in the late return; ....

The Taxpayer has cited to this Hearing Officer two prior decisions, made by other
hearing officers at the Department, in which the issue of which version of Section 7-1-69
applied, and thus which maximum rate of penalty was applicable, was determined
adversely to the Department's position in those cases and in this one. In both cases
decided, the tax periods for which tax was due but unpaid occurred prior to the effective
date of the amendment to Section 7-1-69, but the taxes were assessed after the effective
date of that amendment. In both cases, the Department assessed penalty under the
amended statute, imposing a maximum penalty of 20% of the unpaid tax.
In the first of those decisions, In the Matter of the Protest of Alamo True Value
Home Center, No. 09-02, July 2, 2009, the Hearing Officer stated,
The rule on penalty, whether under the old or amended statute, is only
applied at the time the tax is due but not paid. According to the plain
language of the § 7-1-69 NMSA, it appears that it is not relevant when the
Taxpayer was assessed, but only when the tax was due and not paid. In
the absence of clear language in the statute specifying retroactivity (which
does not exist in this instance), the pertinent inquiry to determine the
maximum percentage of penalty under either the old or amended version
of NMSA 1978, Section 7-1-69 (2008) is not the date of assessment but the
date when the principle tax was due but not paid. If that date was before
January 1, 2008, then the Taxpayer is only subject to a maximum penalty
up to 10%, but if that date is on or after January 1, 2008, then the
Taxpayer is subject to a maximum penalty up to 20%. (Emphasis added).

Similarly, in In the Matter of the Protest of Maria and Robert Cloutier, No. 09-
05, October 28, 2009, the Hearing Officer struck down the Department's attempt to
impose the maximum 20% penalty on taxes which were due but unpaid. The Hearing
Officer ruled that the amended statute was not applicable, "because it was not effective
until January 1, 2008, well after the due date of gross receipts tax being due", and there
was no retroactivity provision in the amended statute making it applicable in instances
where the maximum 10% penalty had already been reached.

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While the circumstances of the above cited protests are indistinguishable from
those in this case, in terms of the taxes being due and unpaid when the earlier version of
the penalty statute was in effect, yet the penalty was assessed after the effective date of
the amended penalty statute, this decision maker is not persuaded that those decisions
were correctly decided. In the best circumstances, it would be preferable if the
Department's hearing officers made consistent determinations as to applicable law. I
believe that it is my role, however, as decision-maker, to make my own determination of
how the law should be applied under the circumstances of matters that come before me.
When I believe that an error in applying the law has been made, it is my responsibility to
apply it correctly in matters assigned to me. In this instance, I believe that the decisions
above are in error with respect to their determination as to when and how, rather than
whether, penalty is to be applied with respect to unpaid taxes.
I agree that both versions of Section 7-1-69(A) look to whether a taxpayer has
been negligent or in disregard of department rules and regulations in failing "to pay when
due the amount of tax required to be paid" in determining whether penalty should be
applied. Both decisions, however, disregard the clear language in Section 7-1-69(A),
found in both the amended and prior versions of that provision, as to when and how
penalty is actually imposed on a taxpayer. When and how penalty is imposed is
addressed by the language of the statute which follows the language about whether a
taxpayer was negligent in failure to pay tax when due. This language provides that where
there has been a failure to pay tax due to negligence or disregard of department rules and
regulations, "there shall be added to the amount assessed a penalty...." (Emphasis
added). Thus, penalty is imposed only when there has been an amount of unpaid tax
which has already been assessed. Section 7-1-17(B) NMSA 1978 informs as to when
there has been an assessment of taxes. "Tax" is defined to include "the amount of any
interest or civil penalty relating thereto", unless the context of the law requires otherwise.
Section 7-1-3 (X) NMSA 1978. Section 7-1-17 (B) provides:
B. Assessments of tax are effective:
(1) when a return of a taxpayer is received by the department
showing a liability for taxes;
(2) when a document denominated "notice of assessment of
taxes", issued in the name of the secretary, is mailed or delivered in person
to the taxpayer against whom the liability for tax is asserted, stating the

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nature and amount of the taxes assertedly owed by the taxpayer to the
state, demanding of the taxpayer the immediate payment of the taxes and
briefly informing the taxpayer of the remedies available to the taxpayer; or
(3) when an effective jeopardy assessment is made as provided in
the Tax Administration Act.

Thus, the only way that penalty is actually imposed upon a taxpayer is when either the
taxpayer itself has filed a return showing a liability for taxes and the taxpayer fails to pay
that liability (a self assessment of taxes) or when the Department issues an assessment of
penalty as part of a "notice of assessment of taxes" or a jeopardy assessment. This
makes perfect sense. This is because under both the previous statute and the amended
Section 7-1-69(A), the calculation of the amount of penalty to be imposed is calculated as
a percentage of the amount of tax which was not paid at the time the tax was due,
multiplied by 2% per month for a maximum of five months under the prior statute or a
maximum of ten months under the amended law, depending upon when the unpaid taxes
are actually paid. Unless there has been an assessment of tax by the Department or a self
assessment by a taxpayer, there is no way of knowing what the amount of unpaid tax is
for purposes of calculating how much penalty is to be imposed. Thus, it is clear that
penalty is not imposed at the time the taxes were due but unpaid. It is only imposed at
the time that the amount of unpaid taxes has been determined. In this case and in the two
decisions decided by the other hearing officers, that time occurred after the effective date
of the statutory amendment. Because the two administrative decisions relied upon by the
Taxpayer disregard the plain language of Section 7-1-69 as to when and how penalty is
calculated and imposed, I believe that they are erroneous in their conclusion that the date
of assessment is irrelevant to determining which version of Section 7-1-69(A) should be
applied when taxes which are due have not been paid.
In this case, there is nothing to indicate that the Taxpayer filed a return showing a
liability for the taxes which were assessed in this matter prior to the commencement of
the Department's audit. If the Taxpayer had done so, and had done so prior to January 1,
2008, the applicable penalty would have maximized at 10% of the unpaid taxes. The
taxes were assessed as a result of an audit by the Department, which was commenced on
July 16, 2008, and the assessment was issued on September 21, 2009, well after the
effective date of the amendments to Section 7-1-69(A) NMSA 1978. Although the

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Taxpayer may have filed returns self assessing the same taxes assessed by the
Department assessment when it reported $519,622.42 in gross receipts taxes and
submitted payment of that amount, that occurred on August 22, 2008, also well after the
effective date of the amendments to Section 7-1-69(A) NMSA 1978. Thus, the amended
version of Section 7-1-69(A) applies. Since the amended version was not applied to
determine the amount of penalty assessed and contested in this matter until well after the
effective date of the amended statute, it has not been applied retroactively, and the
maximum applicable penalty would be 20% in this matter.
This conclusion that the amended version of Section 7-1-69(A) was not
retroactively applied is also supported by a review of New Mexico case law. In Bradbury
& Stamm Construction Co. V. Bureau of Revenue, 70 N.M. 226, 372 P.2d 808 (1962),
the Court was called upon to determine the interest rate to be applied to a claim for
refund of overpaid tax, where the overpayment occurred prior to a change of the statute
specifying the amount of interest to be paid by the state on refunded taxes. In that case,
the statutory amendment lowered the amount of interest which was payable. The Bureau
of Revenue paid interest at the higher rate until the effective date of the statutory
amendment and at the lower rate thereafter. In that case, the taxpayer contested the
application of the lower rate for periods after the statute was amended, arguing that
because the amount of tax due was based on circumstances occurring before the statutory
amendment, the higher rate of interest should apply to the refunded taxes for all periods
until the taxes were refunded. In ruling against the taxpayer, the Court relied on the
general rule applicable to statutory interest on tax refunds that where there has been a
change of law changing the statutory rate after the cause of action accrues, the interest
should be allowed at the old rate before the amendment takes effect and the new rate after
the effective date. Following this rule, the Court found that applying the new rate only
after its effective date would not be giving the statutory amendment a retroactive effect.
Similarly, in this case, the new penalty maximum was only applied after the effective
date of the statutory change, and it was not applied retroactively.
Howell v. Heim, 118 N.M. 500, 882 P.2d 541 (1994) involved the application of a
new regulation rather than an amended statute. In that case, because of a shortage of
funding, the state promulgated a new regulation which limited the duration of state

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funded general assistance disability benefits to twelve months, where previously there
had been no limit on their duration. The plaintiffs argued that in applying this regulation,
the state agency had taken into account months of disability benefits granted before the
regulation's enactment in making its determination as to when twelve months of benefits
had been granted, requiring the cessation of benefits. The Plaintiffs argued, that by doing
so, the state was giving retroactive effect to the regulation in contravention of due
process. The trial court agreed with the plaintiffs and the state appealed from that ruling.
In overruling the trial court, the Court stated that:
A statute or regulation is considered retroactive if it impairs vested rights
acquired under prior law or requires new obligations, imposes new duties
or affixes new disabilities to past transactions. Albuquerque v. State ex rel.
Village of Los Ranchos de Albuquerque, 111 N.M. 608,616, 808 P.2d 58,
66 (Ct.App. 1991), Cert. denied, 113 N.M. 524, 828 P.2d 957 (1992).
"However, a statute does not operate retroactively merely because some of
the facts or conditions which are relied upon existed prior to the
enactment." Id.

Id. at 506, 882 P.2d at 547. Thus, the Court concluded that there was no retroactive
application of the regulation, even though it took into account periods of time prior to its
promulgation. Similarly, in this case, even though the Department considers the facts
and circumstances surrounding the Taxpayer's nonpayment of taxes in determining
whether the imposition of penalty is proper, the amended percentage rate was only
applied when the penalty was assessed, which occurred after the effective date of the
statutory amendment.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the assessment issued under
   letter ID. No. 1178774912 and therefore jurisdiction exists over the parties and the
   subject matter of this protest.
2. Section 7-1-69(A)(1) and (2) NMSA 1978, as amended by Laws 2007,
   ch. 45, § 4 applies to the calculation of the amount of penalty in this matter because the
   penalty was assessed subsequent to the effective date of that amendment.

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3. There has been no retroactive application of Section 7-1-69(A)(1) and (2)
   NMSA 1978, as amended by Laws 2007, ch. 45, § 4 to the Taxpayer under the
   circumstances of this case.

FOR THE FOREGOING REASONS, THE TAXPAYER'S PROTEST IS HEREBY
DENIED.

Dated:_____

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