Could New Mexico estimate a smoke-shop owner's Tobacco Products Tax from a comparable retailer when he failed to provide adequate purchase records?

Subject

Estimated Tobacco Products Tax for Marrakech Express (D&O 13-05)

Plain-English summary

The hearing officer upheld New Mexico's estimated Tobacco Products Tax assessment against Hamza Benderra and Marrakech Express. Benderra admitted at the hearing that he sold pipe tobacco purchased from outside New Mexico and was the first purchaser, even though he had denied selling tobacco products during the audit and in his protest.

The Department had repeatedly requested purchase records, invoices, and other documentation. Benderra supplied only one bank statement during the audit. He later produced three California smoke-shop invoices at the hearing, covering two purchases in August 2008 and one in September 2008. Those purchases totaled $6,424, and he argued that his tax should therefore be only $1,606.

The hearing officer did not accept that the three invoices represented all tobacco purchases from June 2008 through December 2009. The decision emphasized Benderra's inadequate records, his repeated denials, and the hearing officer's finding that his evidence was not credible.

The comparison-based estimate was reasonable

When a taxpayer fails to keep sufficient records, Section 7-1-11(D) allowed the Department to estimate liability by a reasonable method, including information from similarly situated taxpayers.

The auditor used two years of purchase data from another audited tobacco shop with a similar size, building, products, and neighborhood. That produced estimated tobacco-product purchases of $4,663.22 per month. The auditor testified that the comparison was modest because most similarly sized shops had greater sales and purchases. The hearing officer found the auditor credible and held that this method was reasonable.

Tax, penalty, and interest remained due

New Mexico imposed a 25% excise tax on tobacco products, other than cigarettes, payable by the first purchaser. The assessment covered June 2008 through December 2009 and listed $22,150.39 tax, $4,430.08 penalty, and $1,506.26 interest when issued.

Benderra argued that his failure to pay was not willful and came from a lack of knowledge. The decision held that lack of knowledge or an erroneous belief that no tax was owed was negligence for penalty purposes. Interest was mandatory because the tax was not paid when due.

Result: protest denied. The Tobacco Products Tax, penalty, and interest assessment was upheld.

What this means for you

Tobacco retailers buying from outside New Mexico

The decision treated a New Mexico business that bought pipe tobacco from out-of-state sellers and distributed it through its shop as the first purchaser responsible for Tobacco Products Tax.

Businesses with incomplete records

If required purchase records are missing, the Department may estimate liability using a reasonable comparison to a similarly situated business. Producing a few invoices only at the hearing did not prove that they represented every purchase in the audit period.

Tax professionals handling an audit

The assessment began with a presumption of correctness. The taxpayer needed credible evidence covering the full audit period, not only an alternative calculation based on incomplete documents.

Common questions

Q: Why was Benderra subject to Tobacco Products Tax?
A: He admitted that he sold pipe tobacco and was the first purchaser of tobacco products bought from outside New Mexico for distribution through his business.

Q: How did the Department estimate his purchases?
A: It averaged two years of purchases from another audited tobacco shop that the auditor described as similar in size, building, products, and surrounding neighborhood.

Q: Why did the hearing officer reject the three invoices?
A: They documented only three purchases in August and September 2008. Given the missing records, repeated denials, and other audit evidence, the hearing officer did not find Benderra's claim that these were all purchases credible.

Q: Was ignorance of the tax enough to remove the penalty?
A: No. The decision treated lack of knowledge or an erroneous belief that no tax was due as negligence supporting the penalty.

Q: Could the hearing officer waive interest?
A: No. The decision said interest was mandatory on tax not paid by its due date.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17 — presumption that Department assessments are correct
• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, §§ 7-12A-2(D) and (G) — first purchaser and tobacco products definitions
• NMSA 1978, § 7-12A-3 — 25% Tobacco Products Tax imposed on the first purchaser
• NMSA 1978, § 7-12A-8 — tobacco-product seller recordkeeping
• NMSA 1978, §§ 7-1-10 and 7-1-11(D) — records and reasonable estimation of liability
• NMSA 1978, § 7-1-67(A) — interest on tax not paid when due

Cases:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hamza Benderra / Marrakech Express
• Decision PDF: D&O 13-05

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
HAMZA BENDERRA/MARRAKECH EXPRESS, No. 13-05
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0336704064

DECISION AND ORDER

A formal hearing on the above-referenced protest was held February 7, 2013, before Dee

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

represented by Mr. Peter Breen, Staff Attorney. Mr. Andrick Tsabetsaye, Auditor, and Mr. Steve

Duran, Auditor, also appeared on behalf of the Department. Mr. Hamza Benderra (Taxpayer)

appeared for the hearing and was represented by his accountant, Mr. Mark Ihlefeld. The Hearing

Officer took notice of all documents in the administrative file. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was engaged in business in New Mexico in 2008 and 2009. The Taxpayer

was operating a shop that sold pipe tobacco, cigarettes, pipes, and other smoking

accessories.

2. The Taxpayer failed to pay the Tobacco Products Tax (TPT) on the pipe tobacco that he

purchased from June 2008 through December 2009.

3. The Department learned that the Taxpayer was selling pipe tobacco to other retailers

when a merchant provided them with a copy of a handwritten invoice from the Taxpayer

to show that the merchant had purchased the tobacco locally. The merchant explained

that the Taxpayer would come by in his car and sell tobacco to the local shops. The
merchant also gave the Taxpayer’s address and indicated that the Taxpayer had a shop

there.

4. The Department began an investigation into the Taxpayer’s business. Mr. Duran drove

by the Taxpayer’s address and saw that there was a shop there. The shop appeared to be

a smoke shop and advertised that it sold tobacco.

5. Mr. Duran checked the Department’s records on that shop and on the Taxpayer. Mr.

Duran confirmed that the Taxpayer was registered under a CRS number with the

Department and had not been paying the TPT.

6. The Department issued a letter to the Taxpayer, but mistakenly included information on a

different business. The Department re-issued the letter to the Taxpayer with the correct

information. The letter basically advised that the Taxpayer had been chosen for audit

under the TPT and requested that the Taxpayer get his documents in order.

7. The Department conducted an audit of the Taxpayer. Mr. Duran went to the Taxpayer’s

business and noticed that there was not any pipe tobacco on the premises. The Taxpayer

also appeared to be trying to move out of the shop. There was a moving truck outside,

the utilities were not on, and there were boxes inside. There were also pipes, cigarettes,

and other items present.

8. The Taxpayer provided one bank statement during the audit, and did not provide any

receipts, invoices, or other documents. The Taxpayer denied selling any pipe tobacco.

9. The Department repeatedly requested documentation from the Taxpayer during the audit,

and the Taxpayer never provided any further documentation. The Department received

some of its letters back as undeliverable and was informed that the Taxpayer was no

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Letter ID No. L0336704064
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longer at that address. The Taxpayer never filed a change of address with the

Department.

10. The Department sent a copy of the audit report to the Taxpayer before it was finalized

and gave the Taxpayer another opportunity to provide documentation. The Taxpayer

failed to do so.

11. On February 1, 2011, the Department assessed the Taxpayer for Tobacco Products Tax,

penalty, and interest for the tax periods from June 2008 through December 2009. The

assessment was for $22,150.39 tax, $4,430.08 penalty, and $1,506.26 interest.

12. On February 28, 2011, the Taxpayer filed a formal protest letter.

13. On November 20, 2012, the Department filed a Request for Hearing asking that the

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

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the Tobacco Products Tax,

penalty, and interest for the tax periods from June 2008 through December 2009.

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, §

7-1-3. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

795, 779 P.2d 982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is

presumed to be correct, and it is the Taxpayer’s burden to present evidence and legal argument to

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

Tobacco Products Tax.

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Letter ID No. L0336704064
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Purchases of tobacco products in New Mexico are subject to a 25% excise tax, which

must be paid by the first purchaser of such products. See NMSA 1978, § 7-12A-3. Tobacco

products are considered to be “any product, other than cigarettes, made from or containing

tobacco.” NMSA 1978, § 7-12A-2 (G). A first purchaser is anyone who is engaged in business

in New Mexico, who purchases tobacco from anyone outside of the state and distributes that

tobacco in his business. See NMSA 1978, § 7-12A-2 (D). Sellers of tobacco products are also

required to maintain records that indicate where and from whom they purchased their tobacco

products. See NMSA 1978, § 7-12A-8.

The Taxpayer initially denied that he was subject to the TPT. The Taxpayer maintained

throughout the audit process that he did not sell tobacco products. The Taxpayer even indicated

in his protest that he did not sell tobacco products. However, at the hearing, the Taxpayer finally

admitted that he did sell tobacco products and that he was the first purchaser of those products.

The Department also had reasonable grounds to believe that the Taxpayer was selling tobacco

products based upon its investigation during the audit. Therefore, the Taxpayer was subject to

the TPT when he purchased tobacco to sell in his shop.

Computation of Tax.

The Taxpayer argued that he only purchased tobacco products during two of the months

involved in the audit. At the hearing, the Taxpayer provided copies of three invoices from a

smoke shop in California for two tobacco purchases in August 2008 and one purchase in

September 2008. These purchases totaled $6,424.00. The Taxpayer claimed that these

purchases account for his total tobacco products purchases from June 2008 through December

2009. The Taxpayer argued that his liability under the TPT is, therefore, $1,606.00.

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Letter ID No. L0336704064
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The Department argued that the Taxpayer’s production of these invoices occurred too

late. The Department pointed out that it is a tobacco seller’s responsibility to keep accurate

records and to provide them to the Department when requested. See NMSA 1978, § 7-12A-8.

See also NMSA 1978, §§ 7-1-10 and 7-1-11. The Department also pointed out that the

Department is allowed to use any reasonable method of estimating tax liability when a taxpayer

fails to keep sufficient records. See NMSA 1978, § 7-1-11 (D). It is a reasonable method when

the Department uses information from similarly situated taxpayers to estimate a taxpayer’s

liability. See id. The Department estimated the Taxpayer’s liability by using average tobacco

purchases of regional tobacco retailers of a similar size. The average amount of tobacco

products purchased was calculated to be $4,663.22 per month.

The Taxpayer argued that the average used to estimate his tax liability was unfair. The

Taxpayer argued that his total tobacco sales for the period from January through December 2009

were only $1,200.16. The Taxpayer denied being in business prior to January 2009. The

Taxpayer argued that it would not make sense or be feasible for him to purchase more than

$4,000 per month in tobacco products since he only sold $1,200.16 worth of tobacco products

from January through December 2009.

The Department argued that the Taxpayer could not actually show what his sales or

purchase amounts were for the entire audit period. The Department argued that using bank

statements to reconstruct sales and purchases based on deposits and withdrawals was not

appropriate since the Taxpayer was running his business primarily using cash and had

demonstrated an intent to evade taxation. The Department argued that after receiving the letter

advising him of the upcoming audit, the Taxpayer removed the merchandise in question and

attempted to pack up and leave his shop very hastily. The Department also argued that the

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Letter ID No. L0336704064
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Taxpayer had repeatedly denied selling, and consequently purchasing, tobacco products during

the audit process and upon initiating his protest.

Mr. Duran explained the method used to estimate the Taxpayer’s liability. Mr. Duran

articulated that a shop of a similar size in a neighborhood that had other businesses similar to

other businesses in the Taxpayer’s shop’s neighborhood, selling similar products, and with a

similar building was used as the basis for estimating the Taxpayer’s liability. The example shop

was also audited and their tobacco products purchases for two years were averaged. Mr. Duran

also explained that based upon his training and experience, that the estimate used was probably a

modest amount. Mr. Duran explained that most tobacco shops of a similar size actually have

greater sales and purchases than the one used as the estimate example. Mr. Duran also explained

that the audit period was determined by the business start date that the Taxpayer had filed with

the Department when he got his CRS number.

In light of the suspicious activities in which the Taxpayer engaged after receiving notice

of an impending audit and in light of his repeated and ultimately false denials regarding his sales

and purchases of tobacco products, I do not find the Taxpayer’s evidence to be credible. I also

found the testimony of Mr. Duran to be very credible. Based upon the totality of the evidence,

the Taxpayer has failed to overcome the presumption of correctness. Moreover, the evidence

provided by Mr. Duran is sufficient to show that the method used to estimate the Taxpayer’s

liability was reasonable.

Assessment of Penalty.

The Taxpayer argued that his failure to pay the TPT was not willful and was based upon

his own lack of knowledge and understanding. 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

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Letter ID No. L0336704064
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of penalty. See Tiffany Const. Co., Inc. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct.

App. 1976). Therefore, the penalty was properly assessed.

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).

As the tax was not paid when it was due, assessment of interest was appropriate.

CONCLUSIONS OF LAW

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

Products Tax from June 2008 through December 2009 under respective Letter ID number

L0336704064, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer was properly assessed for Tobacco Products Tax, penalty, and

interest.

3. The method used to estimate the Taxpayer’s liability was reasonable.

4. The Taxpayer failed to overcome the presumption of correctness.

For the foregoing reasons, the Taxpayer's protest is DENIED.

DATED: March 4, 2013.

DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

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Letter ID No. L0336704064
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NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, the parties have the right to appeal this decision by

filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date

shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 630, Santa Fe, New Mexico 87504-0630. Mr. Griego may be contacted at 505-827-

0466.

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Order to the parties listed below this _ day of
___, 20__ in the following manner:

First Class Mail and Interoffice Mail
Certified Mail # _________

Mark Ihlefeld, CPA Peter Breen
Re: Hamza Benderra/Marrakech Express Taxation and Revenue Department, Legal
422 Medico Ln, Ste. C 1100 S. St. Francis
Santa Fe, NM 87505 Santa Fe, NM 87504

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Letter ID No. L0336704064
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