Did Rose Ann Mathews owe gross receipts tax, penalty, and interest on counseling services performed in Valencia County in 2005 and 2006?

Plain-English summary

Rose Ann Mathews owed gross receipts tax, penalty, and interest on counseling services performed in New Mexico, but the Department had to correct both the local tax rate and the penalty ceiling. The Valencia County rate applied instead of Belen's higher rate, and the 2005 and 2006 penalties were capped at 10% rather than 20%.

Mathews worked as a counselor in New Mexico during 2005 and 2006 and filed no gross receipts tax reports for either year.

On March 15, 2010, the Department issued two assessments:

• For 2005: $1,281.97 tax, $256.39 penalty, and $559.55 interest.
• For 2006: $1,477.90 tax, $295.58 penalty, and $424.12 interest.

The Department used a 20% penalty cap and calculated the tax using the City of Belen rate. Mathews protested the tax amount, penalty, and interest.

Counseling services were taxable

The decision applied the regulation stating that services performed in New Mexico were subject to gross receipts tax. Mathews's counseling services fell within that rule.

New Mexico's self-reporting system placed responsibility on her to determine and report the tax. The hearing officer found that Mathews was honest, did not intend to cheat the state, and did not know she had to pay gross receipts tax. Even so, lack of knowledge or an erroneous belief that no tax was due constituted negligence.

The Department used the wrong local rate

The original assessments treated Mathews as doing business in the City of Belen, where the rate was higher. At the hearing, the Department conceded that she did business in Valencia County and not within Belen.

The auditor recalculated tax, penalty, and interest at the Valencia County rate and announced new totals at the hearing. Those revised totals do not appear in the published decision, so the public summary does not supply amounts that the source does not state.

The penalty was limited to 10%

The Department argued that the 20% cap applied because the assessments were issued after the higher ceiling became effective in 2008.

The hearing officer rejected that approach. The tax was due in 2005 and 2006, when the applicable statute capped negligence penalty at 10%. The monthly penalty had already exhausted that maximum before the 2008 change took effect.

Without evidence that the Legislature intended retroactive application, the cap depended on the law governing the liability as penalty accrued—not the later assessment date. The Department had to reduce both penalties to the 10% maximum.

Mathews's general protest of penalty and interest was sufficient to let the hearing officer examine the calculation. The Taxpayer Bill of Rights supported abatement of an assessment made incorrectly, erroneously, or illegally.

Interest and the assessment timing were upheld

Interest was mandatory because the gross receipts tax was not paid when due. It compensated the state for the time value of unpaid revenue rather than punishing the taxpayer.

The 2010 assessments were also timely. Because Mathews had filed no gross receipts tax return, Section 7-1-18(C) gave the Department seven years from the end of the year in which tax was due to assess it.

Result: protest GRANTED IN PART and DENIED IN PART. Tax, negligence penalty, and interest remained due after recalculation; the Valencia County rate and 10% penalty cap controlled.

What this means for you

Counselors and other service providers

Services performed in New Mexico can create gross receipts tax even when the provider is an individual professional. Confirm registration, filing frequency, and location-based rate obligations before beginning work.

Businesses near municipal boundaries

Verify whether the business location is inside a city or only in the surrounding county. A mistaken city classification can change tax, penalty, and interest calculations.

Nonfilers receiving an old assessment

The normal assessment window may be longer when no return was filed. This decision applied a seven-year period to the 2005 and 2006 nonfiling years.

Common questions

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

Q: Did her honest lack of knowledge eliminate penalty?
A: No. The decision treated lack of knowledge or erroneous belief as negligence.

Q: Which local rate applied?
A: The Valencia County rate, not the higher City of Belen rate.

Q: Why was the penalty reduced?
A: The 2005 and 2006 liabilities had reached the former 10% cap before the 20% revision became effective.

Q: Was the Department too late to assess in 2010?
A: No. The seven-year nonfiler assessment period applied.

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 assessment period for a nonfiler
• NMSA 1978, § 7-1-4.2(I) (2003) — right to abatement of an incorrectly made assessment
• Regulation 3.2.1.18(A) NMAC (2003) — New Mexico services subject to gross receipts tax

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993)
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021
• TPL, Inc. v. New Mexico Taxation and Revenue Department, 2000-NMCA-083, reversed on other grounds, 2003-NMSC-007

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Rose Ann Mathews
• Decision PDF: D&O 10-18

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
ROSE ANN MATHEWS No. 10-18
TO ASSESSMENTS ISSUED UNDER
ID NOS. L1610557504 and L0056916032

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 5, 2010, before Dee

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

represented by Mr. Peter Breen, Special Assistant Attorney General. Ms. Sylvia Sena, Auditor,

also appeared on behalf of the Department. Ms. Rose Ann Mathews (“Taxpayer”) appeared for

the hearing and represented herself. The Hearing Officer took notice of all documents in the

administrative file. The parties agreed to waive the 30-day limit on the decision. 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 counselor 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 Combined Reporting System.

4. On March 15, 2010, 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

$1,281.97 tax, $256.39 penalty, and $559.55 interest.

5. On March 15, 2010, 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

$1,477.90 tax, $295.58 penalty, and $424.12 interest.

6. The Department applied a 20% penalty cap.

7. On March 18, 2010, Taxpayer filed a formal protest.

8. On May 27, 2010, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

9. On September 18, 2010, Taxpayer filed additional grounds to the formal protest.

10. Taxpayer did not know that she had to pay gross receipts tax. Taxpayer is willing to pay

the taxes that she owes, and has engaged in managed audits for the tax years subsequent

to 2006.

11. Taxpayer protests the assessment of penalty and interest

12. Taxpayer protests the amount of gross receipts tax calculated. Taxpayer was engaged in

business in Valencia County, New Mexico, but was charged the gross receipts tax rate for

the city of Belen, 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 her failure

to file gross receipts tax reports.

Burden of Proof.

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, §

In the Matter of Rose Ann Mathews, page 2 of 6
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

she is not liable for the tax and is entitled to an abatement of penalty and interest. See 3.1.6.12

NMAC (2001). When a taxpayer presents evidence sufficient to rebut the presumption, the

burden shifts to the Department to show that the assessment is correct. See MPC Ltd. v. N.M.

Taxation and Revenue Dep’t., 2003-NMCA-021, ¶ 13, 133 N.M. 217, 62 P.3d 308 (filed October

2, 2002).

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 counseling services were subject to the gross

receipts tax. It is the responsibility of the taxpayer, who is in the position to know the details of

her business activities, to determine accurately and to report her tax liabilities to the Department.

See NMSA 1978, § 7-1-13.

Prior to the hearing, the Department took the position that the Taxpayer was conducting

business in Belen, New Mexico during the applicable tax years. The gross receipts tax rate is

higher in Belen than it is in Valencia County, New Mexico. At the hearing, the Department

conceded that the Taxpayer was engaged in business in Valencia County, New Mexico and was

not engaged in business in the city of Belen, New Mexico. During the hearing, Ms. Sena

testified that the amount of gross receipts tax due was recalculated based on the Valencia County

tax rate. Ms. Sena also testified that the penalty and interest were recalculated based on the new

gross receipts tax total, and she announced the new totals at the hearing.

Assessment of Penalty.

In the Matter of Rose Ann Mathews, page 3 of 6
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).

Computation of Penalty.

The Department objected to the Hearing Officer’s question about penalty because the

Taxpayer did not specifically raise the issue of how the penalty was calculated in the protest.

Taxpayer protested the assessment, and specifically protested the assessment of penalty and

interest. A question about how the penalty is calculated is directly related to the protest on the

assessment of penalty. In order to determine whether a protest should be granted or not, evidence

that is relevant must be admitted. See 3.1.8.10 NMAC (2001). A hearing officer is required to

decide cases based on the facts and the law, but is not limited to a word-for-word consideration of

the parties’ arguments. See TPL, Inc. v. N.M. Taxation and Revenue Dep’t., 2000-NMCA-083, ¶

19, 129 N.M. 539, 10 P.3d 863, rev’d on other grounds TPL, Inc. v. N.M. Taxation and Revenue

Dep’t., 2003-NMSC-007, 133 N.M. 447, 64 P.2d 474 (filed December 19, 2002). Moreover, under

the Taxpayer Bill of Rights, taxpayers have “the right to abatement of an assessment of taxes

determined to have been incorrectly, erroneously or illegally made[.]” NMSA 1978, § 7-1-4.2 (I)

(2003).

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). Ms. Sena testified that the Department had

In the Matter of Rose Ann Mathews, page 4 of 6
assessed a 20% cap because the date that the assessments were issued was after the effective date of

the 2008 amendment. 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). Both the

2003 and the 2008 versions of Section 7-1-69 require that the penalty be calculated by month from

the date that the tax was due until the cap is reached, not from the date of the assessment or the date

that the law changed. As there is not any indication the legislature intended for the change to apply

retroactively, the 10% penalty cap will apply.

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.

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 notified her before 2010, the statute

governs the timeliness of an assessment. Taxpayer was assessed in 2010 for the 2005 and 2006

tax years. Because the Taxpayer was a non-filer, the assessment was made in a timely manner.

In the Matter of Rose Ann Mathews, page 5 of 6
Although it is clear that Taxpayer is an honest person who did not know she had to pay gross

receipts tax and 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.

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 L1610557504 and

L0056916032, and jurisdiction lies over the parties and the subject matter of this protest.

2. Taxpayer owes gross receipts tax, penalty, and interest for 2005 and 2006.

3. The appropriate gross receipts tax rate is the Valencia County, New Mexico rate.

The Department improperly applied the Belen, New Mexico rate in the assessments.

4. Assessment of penalty is capped at a total of 10% because the penalty was

exhausted at the 10% cap under NMSA 1978, Section 7-1-69 (2003) before the January 1, 2008

effective date of the 20% revision under NMSA 1978, Section 7-1-69 (2008) and was exhausted

before the issuing of the respective assessments.

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

DENIED IN PART.

DATED: October 20, 2010.

In the Matter of Rose Ann Mathews, page 6 of 6