Did Edward Marshall owe negligence penalty and interest after failing to report New Mexico gross receipts from his 2006 services?

Plain-English summary

Edward Marshall owed New Mexico gross receipts tax, a negligence penalty, and interest after failing to report receipts from services performed in New Mexico—but his penalty was capped at the 10% maximum in effect when the 2006 tax was due. The Department could not retroactively apply the later 20% maximum.

Marshall moved to New Mexico in 2006 and earned approximately $26,000 helping a Santa Fe startup sell water-treatment services. He reported Schedule C receipts on his federal return and filed in Nebraska, but he did not file a New Mexico return.

IRS information matching led the Department first to a personal-income-tax audit in July 2008. Marshall then paid personal income tax, penalty, and interest. Those discussions did not address gross receipts tax. After the Department later received separate Schedule C information, it began a gross-receipts audit in November 2009.

The Department assessed $1,801.16 of gross receipts tax, $360.24 of penalty, and $497.94 of interest, a total of $2,659.34. Marshall admitted that he owed the principal tax and paid it on January 4, 2010. He protested only the penalty and interest.

The services generated taxable gross receipts

New Mexico imposed gross receipts tax on a person engaging in business in the state, including an individual performing services for monetary benefit. Marshall's approximately $26,000 from services performed in New Mexico was therefore taxable.

The decision emphasized that New Mexico has a self-reporting system. A taxpayer must determine, report, and pay the tax due; lack of awareness does not shift that duty to the Department.

The earlier income-tax audit did not excuse the nonpayment

Marshall argued that Department employees should have warned him about gross receipts tax while helping with the personal-income-tax audit. Had they done so, he said, he would have paid the gross receipts tax in 2008.

The hearing officer found no Department negligence. The IRS supplied personal-income-tax and Schedule C business-income information through separate programs. The employees conducting the first limited-scope audit might not have known how Marshall earned the income, and the evidence did not show that they knew gross receipts tax was due.

Marshall testified that he was unaware of New Mexico's gross receipts tax and had been careless in not filing. Under the cited regulation, inaction, carelessness, and an erroneous belief about liability fell within negligence. His prompt payment after notification did not eliminate the earlier failure to report and pay.

The 20% penalty cap could not be applied retroactively

When the 2006 tax became due, Section 7-1-69 imposed a negligence penalty of 2% per month, capped at 10%. A 2007 amendment increased the maximum to 20%, effective January 1, 2008.

The 2006 liabilities had already reached the old maximum before the amendment took effect. The hearing officer found no statutory language allowing another 10 percentage points to be added to an unpaid balance that had already exhausted the former cap. Statutes and regulations were presumed to operate prospectively unless retroactive intent was clear.

The assessment's 20% penalty was therefore incorrect. The Department had to abate the portion exceeding the 10% cap.

Interest remained mandatory

Section 7-1-67 required interest from the day after tax became due until the principal was paid. Interest compensated the state for the time value of unpaid revenue and did not depend on negligence or personal circumstances.

Because Marshall did not pay the principal until January 2010, the hearing officer upheld the interest accrued through payment.

Result: protest GRANTED IN PART and DENIED IN PART. Gross receipts tax, negligence, and interest were upheld; the penalty was reduced to the 10% statutory maximum applicable to the 2006 liabilities.

What this means for you

Self-employed people and sole proprietors

Income reported on federal Schedule C can also create New Mexico gross receipts tax liability. Filing and paying personal income tax does not substitute for reporting gross receipts tax on services performed in the state.

Taxpayers receiving a limited-scope audit notice

A Department review of one tax type does not necessarily cover every tax generated by the same income. Ask separately about gross receipts, withholding, and income-tax obligations when more than one regime may apply.

Tax professionals reviewing old assessments

Use the penalty statute in effect when the liability arose and check whether a later increase was expressly made retroactive. This decision refused to apply a higher 2008 cap after the earlier maximum had already been reached.

Common questions

Q: Was Marshall's service income subject to gross receipts tax?
A: Yes. He performed services in New Mexico for monetary benefit and received approximately $26,000.

Q: Did Department employees have to warn him during the personal-income-tax audit?
A: No. The evidence did not show that those employees knew about the separate Schedule C gross receipts, and New Mexico's self-reporting system placed the reporting duty on Marshall.

Q: Why was he negligent if he paid after learning about the tax?
A: The negligence occurred when he failed to determine, report, and pay the tax when due. An erroneous belief that no tax was owed fell within the regulatory definition.

Q: What happened to the penalty?
A: It was limited to 10% of the unpaid principal under the law applicable to the 2006 liabilities. The excess attributable to the later 20% cap had to be abated.

Q: Was interest waived?
A: No. Interest was mandatory until the principal was paid in full.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 (1990) — gross receipts tax on persons engaging in business
• NMSA 1978, § 7-9-3.3 (2002) and § 7-9-3.5(A)(1) (2007) — engaging in business and receipts from New Mexico services
• NMSA 1978, § 7-1-13 (2007) — taxpayer's self-reporting and payment duties
• NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-1-69(A)(1) (2003 and 2007 versions) — negligence penalty and the change from a 10% to 20% cap
• NMSA 1978, § 7-1-67(A)-(B) — mandatory interest
• Regulation 3.1.11.10 NMAC — negligence includes inaction, carelessness, and erroneous belief

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)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Kewanee Industries Inc. v. State Taxation and Revenue, 114 N.M. 784, 845 P.2d 1238 (1993)
• Phelps Dodge Corp. v. Revenue Division of the Taxation and Revenue Department, 103 N.M. 20, 702 P.2d 10 (Ct. App. 1985)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Edward R. Marshall Jr.
• Decision PDF: D&O 11-01

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
EDWARD R. MARSHALL JR.
TO ASSESSMENTS ISSUED UNDER
LETTER ID NO. L1771057216 No. 11-01

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on December 7, 2010, before

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

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

witness on behalf of the Department. Mr. Edward Marshall Jr. (“Taxpayer”) appeared

representing himself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2006, Taxpayer, moved to New Mexico and worked for a start up business

selling water treatment services in Santa Fe.

2. The Taxpayer earned approximately $26,000.00 working for this start up business

in Santa Fe.

3. During the same year Taxpayer earned income in Nebraska.

4. For tax year 2006, Taxpayer filed his Federal personal income tax return

indicating gross receipts on Schedule C, filed an income tax return in Nebraska, but was a non-

filer in New Mexico. (Taxpayer Exhibit 1).

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

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

6. On July 23, 2008, as a result of the tape-match information obtained from the

IRS, the Department mailed to Taxpayer a notice of limited scope audit concerning the Personal

Income Tax discrepancy or non-filed return for tax year 2006. (Taxpayer Exhibit 1)

7. Upon receipt of the notice of limited scope audit of personal income tax,

Taxpayer spoke with Department employees about the situation. Based on these conversations,

Taxpayer determined that he should have filed and paid personal income tax for Tax Year 2006.

Taxpayer thus paid personal income tax, penalty, and interest for the outstanding tax year 2006

income tax.

8. The discussions between the Department and Taxpayer related only to the

Taxpayer’s potential liability for personal income tax under the notice of limited scope audit of

personal income taxes. There was no discussion at that point about gross receipts taxes relating

to services performed by the Taxpayer’s Santa Fe business. .

9. On November 25, 2009, the Department sent to Taxpayer a Notice of Limited

Scope Audit commencement for failure to pay gross receipts based on the Schedule C

information obtained from the IRS. (Taxpayer Exhibit 2)

10. On December 9, 2009, the Department assessed Taxpayer project gross receipts

tax in the amount of $1,801.16 in principal, $360.24 in penalty and $497.94 in interest for a total

of $2,659.34 for tax period ending December 31, 2007. (Department Exhibit A)

11. Taxpayer timely filed a written protest to the assessment on December 21, 2009.

In the Matter of the Tax Protest of
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(Taxpayer Exhibit 4)

12. In the protest letter, Taxpayers acknowledged owing the gross receipts tax but

protested the assessment for penalty and interest. (Taxpayer Exhibit 4)

13. On December 30, 2009, Mr. Dillon, the Department’s Protest Auditor, responded

by letter to Taxpayer’s issues in his protest letter notifying Taxpayer of the statutorily mandatory

nature of penalty and interest and that interest accrues until the principal is paid. (Taxpayer

Exhibit 3)

14. On January 4, 2010, Taxpayer paid the principal gross receipts tax. (Department

Exhibit B)

DISCUSSION

The primary issue to be decided is whether Taxpayer is liable for penalty and interest

assessed for gross receipts due to the non-reporting of gross receipts for services in the tax period

ending December 2006. Taxpayer paid the principal gross receipt tax but seeks abatement of

penalty and interest. Taxpayer’s claim for abatement of penalty and interest is that the

Department’s employees who initially helped him should have alerted him to his potential gross

receipts tax liability. Had these employees notified him that he had a potential liability for gross

receipts tax, he would have paid the gross receipt tax liability in 2008 when he paid the personal

income tax liability.

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

In the Matter of the Tax Protest of
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an assessment is mailed to a taxpayer that the presumption of correctness attaches and that

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

1978, §7-1-3 NMSA (2009) defines tax to include not only the amount of tax principal imposed

but also, unless the context otherwise requires, “the amount of any interest or civil penalty

relating thereto." See El Centro Villa Nursing Center v. Taxation and Revenue Department, 108

N.M. 795, 779 P.2d 982 (Ct. App. 1989). See also, Regulation 3.1.6.13 NMAC. Accordingly, the

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

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

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

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

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

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

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

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

individuals.

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

of money…received…from performing services in New Mexico.” Specifically Regulation

3.2.1.18 (P) (3) NMAC states,

Receipts from providing day care for children in a situation where
a person provides day care for children in a residence and the care
for all these children is paid for by the state of New Mexico are
subject to gross receipts tax.
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 4 of 16
In this case, Taxpayer earned approximately $26,000.00 income in New Mexico assisting a

business in its start up operations but failed to file a New Mexico Income Tax Return. Because

this activity is included in “engaging in an activity” with the result of receiving a monetary

benefit and because Taxpayer was performing this service in New Mexico, Taxpayer is liable for

gross receipts tax on his income from those services.

Negligence. Taxpayer’s initial claim of negligence by the Department is based on the

length of time taken by the Department to initially notify Taxpayer that he did not file a tax

return for income earned in New Mexico and that he owed taxes based on his earned income. In

his December 30, 2009 letter to Taxpayer, Mr. Dillon explained that it takes the IRS

approximately two years to share information with the state. Mr. Dillon further explained that

the IRS initially provides information as to personal income tax returns and in a different

program separately provides information as to Schedule C business income for all New Mexico

filers.

New Mexico has a self-reporting tax system with the legislature placing the obligation on

taxpayers to determine their tax liabilities and accurately report those liabilities to the state.

NMSA 1978, §7-1-13 (2007). The self-reporting system requires taxpayers to, after determining

their tax liability, to voluntarily report and pay their tax liabilities to the state. “Every person is

charged with the reasonable duty to ascertain the possible tax consequences of his action.”

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M.16, 17, 558 P.2d 1155, 1156 (Ct. App.

1976), cert denied, 90 N.M. 255, 561 P.2d 1348 (1977). Therefore the taxpayer is bound to
In the Matter of the Tax Protest of
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determine when his/her taxes are due, accurately report same to the Department and pay the

taxes. It is not an excuse that the Taxpayer was unaware that he/she owed taxes.

According to NMSA 1978, §7-2-12 (A) (2003):

Every resident of this state and every individual deriving income
from any business transaction, property or employment within this
state and not exempt from tax under the Income Tax Act [7-2-1
NMSA 1978] who is required by the laws of the United States to
file a federal tax return shall file a complete tax return with the
department in form and content as prescribed by the secretary.
Except as provided in Subsection B of this section, the return
required and the tax imposed on individuals under the Income Tax
Act are due and payment is required on or before the fifteenth day
of the fourth month following the end of the taxable year.

The individual/entity with the knowledge as to income earned and what taxes are owed is

the individual taxpayer. Because the Taxpayer was a non-filer, the Department had no

knowledge about the possibility that Taxpayer might owe taxes until it was notified by the IRS.

It is the responsibility of each taxpayer to properly report income and pay taxes. The fact that

Taxpayer was a non-filer for income earned in New Mexico was the primary reason for delay in

the Department knowing that any tax was owed and in particular gross receipts taxes. Further,

the initial information obtained from the IRS provided the state information only as to personal

income tax but did not provide information as to specifically Schedule C reported income. Mr.

Dillon explained that due to the large number of taxpayers involved and the two separate

programs from the IRS providing different information and noting the limited resources of the

Department it is logical that it would take some time for the Department to determine the tax

In the Matter of the Tax Protest of
Edward R. Marshall Jr.
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liability of an individual Taxpayer.

NMSA 1978, §7-1-18 A (1994) allows the Department up to three years “from the end of

the calendar year in which payment of the tax was due” to issue an assessment. In this matter,

the taxes would have been due April 15, 2007 and the assessment was issued well within the

legislatively mandated time period on December 9, 2009.

Taxpayer’s additional claim of negligence by the Department is based on the

Department’s employees not notifying him during the limited scope audit of his personal income

tax that he would owe gross receipts tax on the income he earned in New Mexico. According to

Mr. Dillon’s letter to Taxpayer part of the problem stems from the fact that the IRS provides

information through two separate programs the initial one being for personal income tax and the

subsequent program providing information as to income reported on Schedule C of the federal

return. It would appear that the state employees may not have had full knowledge as to how the

income was earned and therefore would have not been in a position to notify Taxpayer of the

potential gross receipts tax liability.

Mr. Dillon explained that, it is regrettable that Taxpayer was not asked about potential

Schedule C income when conducting the audit of personal income tax liability and regrettable

that Taxpayer did not bring the matter to the Department employees’ attention. Mr. Dillon

speculated that perhaps because the initial audit was focused strictly on personal income tax

liability that the gross receipts tax liability was overlooked. While it would have been helpful to

the Taxpayer for the Departments’ employees to have questioned him as to his potential gross

In the Matter of the Tax Protest of
Edward R. Marshall Jr.
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receipts liability, the evidence does not establish that the Department’s employees had

knowledge at the time of the personal income tax limited scope audit that gross receipts would be

due and owing.

In addition, there is no provision within the regulations which allows for abatement of the

negligence penalty because a Department employee failed to alert a Taxpayer of potential tax

consequences that he or she may not have known about. NMSA 1978, Sec 7-1-69 (A) governs

the imposition of a civil penalty for “failure due to negligence or disregard of department rules and

regulations” to pay a tax when due. While this statute was modified in 2007 to increase the amount

of penalty from 10% to 20%, effective January 1, 2008, the wording of this portion of the statute

was not modified by the 2007 amendment. NMSA 1978 Sec. 7-1-69 provides that when a

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

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

“negligence” as used in §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.

Taxpayer testified that he was careless in not filing a New Mexico tax return, that he was

unaware that gross receipts taxes would be due as such tax is unique to only a few states including

New Mexico, and that he immediately paid the principal amount of the tax when notified and

having verified that such was due. Taxpayer erroneously believed that he would not be liable for
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
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any taxes owed to the state based on the gross receipts. This error meets the definition of negligence

set out in Department regulations and in New Mexico case law. See C & D Trailer Sales v.

Taxation and Revenue Dept., 93 N.M. 697, 699, 604 P.2d 835, 837 (Ct. App. 1979) (a taxpayer's

mere belief that he is not liable to pay taxes is tantamount to negligence within the meaning of

the statute); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795,

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

unintentional failure to pay tax.).

Additionally, Taxpayer acknowledged that he failed to file his gross receipts returns for

2006. By statute negligence includes inaction when action is required. Whether or not

employees should or could be held to a higher standard, an employee cannot be held to have

knowledge of information that can only be obtained from either Taxpayer or the IRS when the

Department does not have access to that information as Taxpayer has not provided that

information nor has it been obtained from the IRS at the time of the audit. Therefore the

evidence does not establish that the Department was negligent based on its employees not

notifying Taxpayer of a potential gross receipts tax liability at the time of the personal income

tax limited scope audit.

Amount of Civil Penalty. Taxpayer’s protest includes the amount of penalty applied to

the principal amount of tax. In Taxpayer’s protest letter of December 21, 2009, he specifically

notifies the Department that he is protesting the assessment of penalty and interest and he is

requesting as affirmative relief that the penalty and interest be waived. NMSA 1978, S7-1-24 (A)

In the Matter of the Tax Protest of
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(2003) allows a taxpayer to dispute an assessment as to “any amount of tax, the application to the

taxpayer of any provisions of the Tax Administration Act… by filing with the secretary a written

protest against the assessment…” with the statute enumerating that the protest must identify the

taxpayer, the grounds for the protest and the affirmative relief requested.

The next determination to be made is the amount of penalty to be assessed. Taxpayer’s
tax liability is based on taxes not paid in 2006 and January 2007. In 2007, the legislature
amended the penalty statute to increase the amount of penalty from 10% to 20%, effective as of
January 1, 2008. It must be determined whether the penalty should be capped at 10% pursuant to
the law in effect when the tax was due or 20% pursuant to the law in effect as of January 1, 2008.
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 tax 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 Section 7-1-69 (2007) 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)
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 10 of 16
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 twenty percent of the tax due but not paid.

The only modification in the statute from the 2003 version as compared to the 2007 version is
simply the increase in penalty from 10% to 20%.
When determining the meaning of a statute the primary concern “is to implement the intent
of the legislature…In determining this intent, we look primarily to the language of the act and
the meaning of the words, and when they are free from ambiguity, we will not resort to any other
means of interpretation.” Security Escrow Corp. v. State Taxation & Revenue Dept. 107 N.M.
540, 543, 760 P.2d 1306, 1309. State of New Mexico ex rel Shell Western E & P. Inc. v. John J.
Chavez, Secretary Taxation & Revenue, 2002-NMCA-5, 131 N.M. 445. 38 P/3d 886, ¶7. In
determining legislative intent it is critical to consider the statute as a whole.
The recent Court of Appeals case of Wood v. State of New Mexico Educational Retirement
Board, filed November 10, 2010, Docket No. 29,680 provides a thorough review of the process of
interpreting a statute with the court explaining that the goal is to give “primary effect to the intent of
the legislature” by looking to the wording of the statute and attempt to apply “the plain meaning
rule, recognizing that a statute contains language which is clear and unambiguous, we must give
effect to that language and refrain from further statutory interpretation… Moreover, unless the
Legislature expresses a contrary intent, we are to give statutory words ‘their ordinary meaning’ and
this Court is prohibited from reading ‘into a statute…language which is not there…”¶ 12. Clearly, if
the plain meaning of the statute requires a certain action an alternative opposite meaning cannot be
applied.
In considering the plain meaning of the statute and the statute as a whole to determine
legislative intent, §7-1-69 has several different factors all of which are important including the
percent of penalty due and owing at issue in this case and other cases that the Department has
appealed. The Department’s position is that so long as a taxpayer has not paid his or her assessment
as of January 1, 2008, the Department has the legal authority to recalculate the penalty and add an
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 11 of 16
additional 10% penalty. The entire statute must be considered in total in order to make this
determination. Since all the factors for imposition of a penalty were present, the law requires that
penalty be added to the amount assessed in principal.
The determination as to the amount of penalty is based on an amount equal to the greater of
two percent per month or any fraction of a month from the date the tax was due. In determining
what the legislature meant by “when the tax was due” consideration is given to other statutes in
effect at the time. As discussed New Mexico’s self-reporting system places the obligation on
taxpayer to determine his tax liabilities and accurately report those liabilities to the state. NMSA
1978, §7-1-13 (2007). Tiffany Construction Co. v. Bureau of Revenue, 90 N.M.16, 17, 558 P.2d
1155, 1156 (Ct. App. 1976), cert denied, 90 N.M. 255, 561 P.2d 1348 (1977). The due date for
the filing of the return and payment of tax would have been on or before the 25th of the month
following the month in which the taxable event occurs. NMSA 1978, Section 7-9-11 (1969).
Pursuant to the self-reporting system Taxpayer was obligated to report and pay tax on
that date. Having acknowledged in the hearing that he was unaware taxes were due and upon
notification that such taxes were legally due, Taxpayer acknowledged his liability and paid the
principal amount of the tax only questioning whether or not they owed the penalty and interest
“Therefore any penalty due to negligence shall be equal to “two percent per month or any fraction
of a month from the date the tax was due.”
As the gross receipts taxes for 2006, they were due on multiple dates. The statute in effect
at that time was the 2003 version of the statute. The assessment of penalty should be calculated as
two percent per month or any fraction of a month commencing when the tax was due. Once
Taxpayer reached the maximum penalty cap for all reporting periods in January 2007, the “not to
exceed” language of the statute prohibited any further imposition of penalty against the still
unpaid principal tax due. Because the penalty provision had already been exhausted by the time
the new amendment became effective January 1, 2008, the Department could not apply an
additional 10% penalty to the principal amount of tax. The intent of the Legislature was that the
new penalty provision apply prospectively and not retroactively.
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 12 of 16
In addition, the Taxpayer bill of rights specifically entitles Taxpayers to seek review of
any adverse decisions relating to determinations made during the audit or protest procedures and
further entitles Taxpayers to abatement of any assessment determined to have incorrectly,
erroneously or illegally made (emphasis added). In Sonic Industries Inc. v. State, 2000-NMCA-
087,129 N.M. 657, 11 P.3d 1219, the court explained that if a taxpayer ignores its tax obligations
and consults with counsel only after an assessment is issued such cannot establish a diligent
protest and “does not provide a bias for avoiding a penalty” citing Phillips Mercantile Co. v
Taxation & Revenue, 109 N.M. 487, 491, 786 P.2d 1221, 1225 (Ct. App. 1990). Clearly, such
action does not clear the Taxpayer of an obligation to pay penalty. However such penalty must
be the correct amount of penalty pursuant to New Mexico law. A Taxpayer is not required to pay
a miscalculated or incorrect amount of penalty. When the Department errs in its calculation of
penalty the Taxpayer bill of rights requires the Department to only charge Taxpayer in
accordance with the statute and not a cent more.
The Department argued that 20% penalty should apply. The Department’s calculation of
the penalty is not correct. The amount of negligence penalty added to the underlying principal
tax liability by the Department is not in accordance with the meaning of §7-1-69 (2003, prior to
amendments through 2007). §7-1-69 (A) (1) provides that if the tax required to be paid when due
is not paid, the Department may add civil penalty in an amount “…not to exceed ten percent of
the tax due but not paid.” 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
In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 13 of 16
prospectively only, unless an intention on the part of the legislature is clearly apparent to give
them retroactive affect.” See also Karpa v. Commission of Internal Revenue, 909 F.2d 784
(1990).
Our Supreme Court addressed the issue of prospective versus retroactive application of this penalty
statute in Kewanee Industries Inc. V. State Taxation & Revenue, 114 N.M. 784, 845 P.2d 1238 (1993). The
Department was attempting to apply certain regulations in assessing penalty. Our Supreme Court determined
that as the regulations were not in effect during the tax years at issue determining that the regulations could
not be applied to the taxpayer as it would be a retroactive application of the regulation. The court explained,
“A regulation promulgated by an administrative agency shall be construed to have retroactive effect only if it
is clearly and manifestly intended” The court cited Psomas as authority for prospective application only
unless clear intent by the legislature to require retroactive application. Sec. 7-1-69 (2007) does not
establish clear intent by the legislature to require retroactive application. Therefore penalty is
capped at 10%.
Interest. NMSA 1978, § 7-1-67 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).
B. Interest due to the state under Subsection A or D of this section shall be
at the rate of fifteen percent a year, computed on a daily basis;…

Subsection A determines the period for which interest is due and Subsection B directs that the
interest be calculated at a rate of 15% per year, computed on a daily basis. 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

In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 14 of 16
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). Taxpayer’s claim that he was not negligent does not assist
him in abating interest as interest is not determined or forgiven based on non-negligence but
rather of non-payment of taxes due. Therefore interest is due and owing by Taxpayer based on
his non-payment of gross receipts tax.
CONCLUSIONS OF LAW

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

under Letter ID No. L1771057216 with Taxpayer specifically protesting the assessment of penalty

and interest and requesting abatement of both. Jurisdiction lies over the parties and the subject

matter of this protest.

B. Taxpayer was negligent in failing to report gross receipts taxes in tax year 2006 and

properly owed the principal amount of the gross receipts tax.

C. Taxpayer paid the principal amount of the assessment in January 2010.

D. The Department was not negligent in issuing the assessment for non-payment of

gross receipts taxes.

E. The Department correctly assessed interest, pursuant to NMSA 1978, §7-1-67.

In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 15 of 16
Taxpayer owes the interest which accrued until the principal amount was paid in full.

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

provided in NMSA 1978, §7-1-69(A)(1)(2003, prior to amendments through 2007) and any

amounts added or assessed in excess of the ten percent shall be abated.

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

IN PART: the Department is ordered to abate ten percent of the penalty amount for tax year 2006.

DATED: January 7, 2011.

In the Matter of the Tax Protest of
Edward R. Marshall Jr.
Page 16 of 16