Could a counseling contractor deduct services passed through to an insurer when the buyer paid no gross receipts tax and delivered a late NTTC?

Plain-English summary

Healing Through Hypnosis could not deduct its 2006 counseling receipts because the buyer's resale was not shown subject to gross receipts tax and the supporting NTTC was late and incomplete. The taxpayer's assumption that the buyer's medical deduction flowed through to the subcontractor did not satisfy either requirement.

Charlette Forteza-Bach formed the sole proprietorship in 2006 and performed counseling as an independent contractor for Martin Klehn. Klehn held a contract with Value Options, Inc. and paid Healing Through Hypnosis the entire contracted amount for the services it actually performed.

Klehn said a Department employee told him that his Value Options receipts qualified for a medical deduction, so he paid no gross receipts tax. Healing Through Hypnosis assumed its receipts were also deductible and filed no 2006 gross receipts tax returns.

The service-resale deduction failed on both conditions

The decision treated Section 7-9-48 as the most likely claimed deduction. That provision required a buyer to deliver an NTTC and required the buyer's ordinary-course resale to be subject to gross receipts tax.

Klehn's resale was not taxed because he claimed a medical deduction. There also was no evidence that Value Options paid gross receipts tax on the counseling. Healing Through Hypnosis therefore did not establish a taxable resale.

It also lacked a timely certificate. The Department's June 2009 audit notice initially gave the taxpayer until August 2. After a call requesting more time, the Department issued a new notice extending the deadline to September 29.

Klehn did not provide a Type 5 NTTC until October 29, one month late. The certificate also lacked an execution date and had not been generated through the Department's online system. The mandatory deadline left no authority to allow the deduction.

The separate medical deduction did not apply

The decision also examined Section 7-9-77.1. Healing Through Hypnosis was paid by Klehn rather than the United States or a federal agency, defeating the provision for counseling services to Medicare beneficiaries.

There was no evidence that Klehn was a TRICARE third-party administrator, and the cited TRICARE subsection covered services by medical doctors and osteopathic physicians rather than counselors.

No one else was shown to have paid this tax

Equitable recoupment required proof that another person paid tax on the taxpayer's behalf on the same transaction. Klehn testified that he paid none, and there was no evidence that Value Options paid it. Recoupment therefore failed.

The taxpayer also alleged oral statements extending the NTTC deadline or saying the liability had been extinguished after the Department captured a personal income tax refund. Nothing was in writing, and the decision found such reliance unreasonable in the face of the formal assessment and statutory collection duty.

Penalty and interest remained

The Department captured $497.99 of Bach's 2009 personal income tax refund and applied it to the liability, reducing gross receipts tax principal from $4,620.84 to $4,122.85.

Interest continued from the original tax due date despite the long delay between protest and hearing. Public-officer delay did not create a defense, and the interest statute was mandatory.

Penalty was upheld because the taxpayer did no research into the tax consequences and did not obtain a timely NTTC despite receiving more than the usual 60-day audit opportunity.

Result: protest DENIED. At the hearing, Healing Through Hypnosis owed $4,122.85 tax, $924.17 penalty, and $1,875.71 interest, totaling $6,922.73.

What this means for you

Subcontractors providing potentially deductible services

Your customer's deduction does not automatically become your deduction. Identify the provision that applies to your own receipts and satisfy each condition independently.

Service sellers relying on an NTTC

Obtain a complete certificate by the return due date or, at the latest when permitted, within the audit notice's statutory window. An oral extension beyond a written deadline was not recognized here.

Taxpayers claiming another party paid the tax

Bring evidence of actual payment on the same transaction. Assumptions that an insurer or contractor handled the tax do not establish equitable recoupment.

Common questions

Q: Were the counseling services actually resold?
A: Yes, but the deduction also required the resale to be subject to gross receipts tax, which was not shown.

Q: Why didn't the October NTTC work?
A: It arrived after the September 29 deadline and was incomplete.

Q: Did the captured income tax refund pay the whole assessment?
A: No. The Department applied $497.99, but $6,922.73 remained due at the hearing as interest continued accruing.

Q: Could hearing delay eliminate interest?
A: No. The decision applied the mandatory-interest statute from the original due date until principal payment.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-4, and 7-9-5 — engaging in business and taxable-receipts presumption
• NMSA 1978, §§ 7-9-43 and 7-9-48 and Regulation 3.2.201.12(C) NMAC — NTTC deadline and service-resale deduction
• NMSA 1978, § 7-9-77.1 — specified medical and health-care deductions
• NMSA 1978, § 7-1-28(F) — equitable recoupment
• NMSA 1978, §§ 7-1-17, 7-1-67, and 7-1-69 — assessment duty, interest, and civil penalty
• Regulation 3.1.11.10 NMAC — negligence

Cases cited:

• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — untimely NTTC as a valid basis to deny a deduction
• Kilmer v. Goodwin, 2004-NMCA-122 — oral Department statements and equitable estoppel
• Ranchers-Tufco Limestone Project Joint Venture v. Revenue Division, 1983-NMCA-126 — public-officer delay not a defense

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Healing Through Hypnosis
• Decision PDF: D&O 14-09

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
HEALING THROUGH HYPNOSIS No. 14-9
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1305376832

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on March 5, 2014 before Brian

VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Charlette Forteza-Bach appeared pro se for

Healing Through Hypnosis (“Taxpayer”). Mr. Martin Klehn appeared as a witness on behalf of

Taxpayer. Staff Attorney Kathleen Carlow appeared representing the State of New Mexico,

Taxation and Revenue Department (“Department”). Protest Auditor Sonya Varela appeared as a

witness for the Department. Taxpayer Exhibits 1-3 and Department Exhibits A-D were admitted

into the record, as described more thoroughly in the Administrative Protest Hearing Exhibit Log.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On January 14, 2010, the Department assessed Taxpayer for $4,620.84 in gross

receipts tax, $924.16 in penalty, and $1,295.69 in interest for a total assessment of $6,840.69 for

the combined reporting period ending on December 31, 2006. [Letter id. no. L1305376832].

2. On January 15, 2010, Taxpayer protested the Department’s assessment.

3. On May 17, 2010, the Department acknowledged receipt of Taxpayer’s protest.

4. On August 8, 2013, the Department requested a hearing in this matter with the

Hearings Bureau.

5. On August 12, 2013, the Hearings Bureau sent Notice of Administrative Hearing,

scheduling this matter for a hearing on September 19, 2013.

6. On August 30, 2013, the Hearings Bureau sua sponte sent Amended Notice of

Administrative Hearing, rescheduling the protest hearing in this matter on March 5, 2014.

7. Taxpayer is a sole proprietorship formed by Ms. Bach in 2006.

8. In 2006, Taxpayer provided counseling services for Martin Klehn as an

independent contractor.

9. 2006 was the first year that Taxpayer and Mr. Klehn worked together.

10. In 2006, Mr. Klehn contracted with Value Options, Inc, a medical insurance

company, to provide group and individual counseling services.

11. Mr. Klehn consulted with the Department about whether he needed to pay gross

receipts tax to the Department on money he received under the Value Options, Inc. contract. Mr.

Klehn was informed by a Department employee that those receipts qualified as a healthcare

services medical deduction.

12. Because the receipts were deductible, Mr. Klehn never paid any gross receipts tax

on the money he received from Value Options, Inc.

13. Taxpayer, as an independent contractor with Mr. Klehn, actually performed Value

Options, Inc.’s contracted counseling services. Mr. Klehn then paid Taxpayer the entire

contracted amount. [Taxpayer Ex.’s 1-2].

14. Taxpayer assumed that because Mr. Klehn’s Value Options Inc. receipts were

deductible from gross receipts tax, Taxpayer’s receipts were also deductible.

In the Matter of the Protest of Hearing Through Hypnosis, page 2 of 14

15. Taxpayer did not file 2006 gross receipts tax returns with the Department.

16. Taxpayer did not possess a NTTC from Mr. Klehn in 2006 when she performed

her independent contracting services for him, and did not have a NTTC at the time the 2006

gross receipts tax were due.

17. Based on the Tapematch Program the IRS has with the Department, the

Department detected that Taxpayer had Schedule C business income on her 2006 personal

income tax return that had not been reported as gross receipts in New Mexico.

18. On June 3, 2009, the Department sent Taxpayer Notice of Limited Scope Audit

Commencement, informing Taxpayer of the discrepancy between the Schedule C and absence of

gross receipts tax filings and informing Taxpayer that she had until August 2, 2009 to produce

any Nontaxable Transaction Certificates (“NTTC”) supporting a claimed deduction.

[Department Ex. A].

19. Taxpayer called the contact number on the June 3, 2009 Notice of Limited Scope

Audit and asked for an extension.

20. On July 31, 2009, the Department reissued a Notice of Limited Scope Audit,

effectively extending the initial 60-days deadline until the September 29, 2009 deadline listed on

that document.

21. Taxpayer was out of state in California during August and did not receive the July

31, 2009, Notice of Limited Scope Audit until she returned.

22. Although Taxpayer believed she received an extension of time from the

Department to produce a NTTC beyond the September 29, 2009 deadline, Taxpayer did not

submit a written request for an extension of time to the Department and never received anything

in writing indicating that she had been granted an extension of time beyond September 29, 2009.

In the Matter of the Protest of Hearing Through Hypnosis, page 3 of 14

23. On October 29, 2009, a full month after the 60-day deadline had passed, Taxpayer

received a Type 5 NTTC from Mr. Klehn.

24. The Type 5 NTTC Taxpayer received from Mr. Klehn was untimely and was

incomplete because it was not generated using the Department’s online system and did not

include an execution date.

25. On June 29, 2010, the Department captured $497.99 of Ms. Bach’s 2009 personal

income tax refund and applied it to Taxpayer’s liability. [Taxpayer Ex. #3].

26. As of the date of hearing, Taxpayer owed $4,122.85 in gross receipts tax,

$924.17 in penalty, and $1,875.71 in interest for a total outstanding liability of $6,922.73.

[Department Ex. D].

DISCUSSION

Taxpayer was a non-filer of gross receipts taxes in 2006, which the Department

discovered through its tape-match program with the IRS. The Department sent Taxpayer two

Notices of Limited Scope Audit, the last of which established a September 29, 2009 deadline to

produce a NTTC. Taxpayer did not present any NTTCs executed by that deadline. The

Department assessed Taxpayer and Taxpayer timely protested the assessment.

There are three main issues in this protest. The first main issue is whether Taxpayer

established she was entitled to a deduction from gross receipts tax in this matter and whether

Taxpayer timely possessed a NTTC supporting a claimed deduction. The second issue is whether

equitable recoupment applies to the facts of this case. The third issue is whether alleged

undocumented oral statements of a Department employee waived Taxpayer’s liability in this

matter. The fourth issue is whether Taxpayer is liable for interest that accrued during the delay

In the Matter of the Protest of Hearing Through Hypnosis, page 4 of 14
from the protest until the hearing. And the final issue is whether Taxpayer was subject to civil

negligence penalty.

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Moreover, “[w]here an exemption or

deduction from tax is claimed, the statute must be construed strictly in favor of the taxing authority,

the right to the exemption or deduction must be clearly and unambiguously expressed in the statute,

and the right must be clearly established by the taxpayer.” Wing Pawn Shop v. Taxation and

Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also

TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447.

Gross Receipts Tax, Deductions, and the Requirement for a Timely NTTC

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Under the Gross Receipts and

Compensating Tax Act, there is a statutory presumption that all receipts of a person engaged in

business are taxable. See NMSA 1978, § 7-9-5 (2002).

In this case, it is undisputed that Taxpayer worked as an independent contractor for Martin

Klehn in 2006 rather than as an employee. See NMSA 1978, § 7-9-17 (exempting wages of

employees from gross receipts tax); See also Regulation 3.2.105.7 NMAC (defining “employee”).

Since Taxpayer was an independent contractor in 2006 rather than an employee, Taxpayer was a

In the Matter of the Protest of Hearing Through Hypnosis, page 5 of 14
person engaged in business and all her receipts are presumed subject to gross receipts tax. See § 7-9-

3.3 and § 7-9-5.

The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. It is unclear exactly which deduction Taxpayer sought in this matter, as neither

Taxpayer nor the Department asserted the specific deduction that Taxpayer was claiming.

Presumably, the deduction at issue is sale of a service for resale under NMSA 1978, Section 7-9-48

(2000). Section 7-9-48 states that:

Receipts from selling a service for resale may be deducted from
gross receipts or governmental gross receipts if the sale is made to a
person who delivers a nontaxable transaction certificate to the seller.
The buyer delivering the nontaxable transaction certificate must
resell the service in the ordinary court of business and the resale must
be subject to the gross receipts tax....

Simply performing a service for resale, as the Taxpayer did in this instance, is not enough to satisfy

the requirements of the deduction under Section 7-9-48. Taxpayer must both have a NTTC and the

subsequent resale of the service in the ordinary course of business must be subject to gross receipts

tax in order to qualify for a deduction under Section 7-9-48. Taxpayer did not establish that either

condition was satisfied in this matter and therefore Taxpayer was not entitled to the Section 7-9-48

sale of a service for resale deduction.

Contrary to the requirements of the Section 7-9-48 deduction, Mr. Klehn’s subsequent resale

of Taxpayer’s services was not subject to gross receipts tax. Mr. Klehn testified that he did not pay

gross receipts tax on his contract with Value Options, Inc. because it was deductible under an

unspecified medical deduction. Additionally, there is no evidence on this record whether Value

Options, Inc. paid any gross receipts taxes on the counseling services that Mr. Klehn subcontracted

to Taxpayer.

In the Matter of the Protest of Hearing Through Hypnosis, page 6 of 14
Moreover, Taxpayer also did not timely possess a NTTC in this case. The statute clearly and

unambiguously conditions the deduction on a sale made to a person/entity who delivers a NTTC.

NMSA 1978, Section 7-9-43 (2011) articulates the requirements for obtaining NTTCs:

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

Under Section 7-9-43, Taxpayer had a statutory obligation to possess a NTTC at the time when the

gross receipts tax was initially due for her 2006 performance of counseling services for Mr. Klehn.

In this case, it is undisputed that Taxpayer did not possess a NTTC from Mr. Klehn when the 2006

gross receipts tax were due.

While taxpayers “should” have possession of required NTTCs at the time the return is due

from the receipts at issue, Section 7-9-43 gives taxpayers audited by the Department a second

chance to obtain these NTTCs: within 60-days of when the Department gives notice, taxpayers must

possess a NTTC in order to claim a deduction. Taxpayers who rely on this second chance provision

run the risk of having their deductions disallowed if they are unable to meet the 60-day deadline set

by the Legislature. The reason why a taxpayer cannot obtain a NTTC is irrelevant. The language of

Section 7-9-43 is mandatory: if a seller is not in possession of required NTTCs within 60 days from

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

these nontaxable transaction certificates shall be disallowed." (emphasis added). See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the

word “shall” in a statute indicates provision is mandatory absent clear indication to the contrary).

In the Matter of the Protest of Hearing Through Hypnosis, page 7 of 14
Consistent with the statutory language, under Regulation 3.2.201.12 (C), a taxpayer “is not

entitled to the deduction” when the NTTC is untimely. See Chevron U.S.A., Inc. v. State ex rel.

Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). The New Mexico Court of

Appeals has held that, despite its general reluctance to place “form over substance,” the failure to

timely and properly present a requisite NTTC is a “valid basis” for the Department to deny a

claimed deduction. Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-

042, ¶22, 107 N.M. 392.

In this case, the Department issued a Notice of Limited Scope Audit on June 3, 2009,

directing Taxpayer to produce a supporting NTTC by August 2, 2009. Taxpayer effectively

received an extension of the 60-day second chance NTTC statutory limit when the Department

issued a second Notice of Limited Scope Audit on July 31, 2009, setting a new deadline for a NTTC

by September 29, 2009. Taxpayer did not produce a NTTC executed by this September 29, 2009

deadline. Although Taxpayer indicated she was out of state in August, causing her to not request the

NTTC in time, the reason why Taxpayer did not have a NTTC by this September 29, 2009 deadline

is immaterial under Section 7-9-43. Under Section 7-9-43, the Department has no authority to allow

a deduction after the expiration of the second chance, 60-day deadline.

Taxpayer claimed she received an oral extension of time beyond the September 29, 2009

60-day NTTC deadline. There is insufficient evidence to find that Taxpayer was granted another

extension in this matter. Even assuming that a Department employee made such a statement, there

was nothing reduced to writing. Equitable estoppel generally does not apply against the State when

a taxpayer relied on the oral advice from a Department employee rather than a written assertion.

See Kilmer v. Goodwin, 2004 NMCA 122, ¶28, 136 N.M. 440. The NTTC that Taxpayer

In the Matter of the Protest of Hearing Through Hypnosis, page 8 of 14
presented in this matter with an issue date of October 29, 2009 was a full month after the Section

7-9-43 deadline and the Department lacked authority to allow the claimed deduction.

The only other deduction that might possibly apply in this matter is the deduction found

under NMSA 1978, Section 7-9-77.1 (2007) for certain medical and health care services, which

does not require a NTTC. In pertinent part, Section 7-9-77.1 (A) allows deduction of receipts

from payment of the United States government or any agency therefore for the provision of

counseling services to Medicare beneficiaries. Taxpayer did not receive payment from an agency

of the US government, but from Mr. Klehn, making Section 7-9-77.1 (A) inapplicable. Section

7-9-77.1 (B) allows deduction from receipts paid by a third-party administer of the federal

TRICARE program for medical and other health services by medical doctors and osteopathic

physicians. This section does not apply in this matter for a couple of reasons. First, there is no

evidence that Mr. Klehn is a third-party administrator of a TRICARE program. Secondly, unlike

subsection (A) which lists counselors and therapists as eligible for the deduction, this section

lists only medical doctors and osteopathic physicians, suggesting that even if there was evidence

that Mr. Klehn was a third-party administer, Taxpayer’s counseling services would not be

eligible for a deduction under Section 7-9-77.1 (B).

Equitable Recoupment and Equitable Estoppel.

Because the protest letter indicated that Taxpayer’s “employer made tax payments to the

State on” Taxpayer’s behalf, a potential issue at hearing is whether equitable recoupment under

NMSA 1978, Section 7-1-28 (F) (2013) supported abatement of the assessment. Under Section 7-1-

28 (F), an assessment can be abated by the “amount of tax previously paid by another person on

behalf of the taxpayer on the same transaction; provided that the requirements of equitable

In the Matter of the Protest of Hearing Through Hypnosis, page 9 of 14
recoupment are met.1” However, the evidence during the hearing did not establish that anyone

paid gross receipts tax on behalf of Taxpayer. Mr. Klehn testified that he did not pay any gross

receipts tax on the money he received from Values Options, Inc., and that he assumed Taxpayer

likewise would not have to pay the gross receipts tax. There is no evidence whether Value

Options, Inc. paid gross receipts taxes on behalf of Taxpayer. Since Taxpayer could not establish

that someone else paid the gross receipts tax on her behalf, equitable recoupment under Section

7-1-28 (F) does not provide a basis to abate the assessment.

Taxpayer also suggested that a Department employee had told her either that her

outstanding liability had been extinguished, or that the Department’s capture of her 2009

personal income tax refund satisfied her outstanding gross receipts tax liability. Although

Taxpayer’s assertion is somewhat unclear, the hearing officer understands Taxpayer’s argument

to be a request for equitable relief in light of the oral statements of a Department employee.

As a general rule, courts are reluctant to apply the doctrine of equitable estoppel against the

state in cases involving the assessment and collection of taxes. See Taxation & Revenue Dep’t v.

Bien Mur Indian Mkt. Ctr., Inc., 1989-NMSC-015, ¶9, 108 N.M. 22. In such cases, estoppel

applies only pursuant to statute or when “right and justice demand it.” Bien Mur Indian Market, ¶9.

As discussed above, oral statements not reduced to writing are generally not amendable to

equitable estoppel. See Kilmer, ¶28.

Estoppel cannot lie against the state when the act sought would be contrary to the

requirements expressed by statute. See Rainaldi v. Public Employees Retirement Board, 1993-

NMSC-028, ¶18-19, 115 N.M. 650. The Department is statutorily obligated to pursue an

1
The elements of equitable recoupment are: “1) a single taxable event, 2) taxes assessed on that
event on inconsistent theories, and 3) a strict identity of interest.” Teco Invs. v. Taxation &
Revenue Dep't, 1998 NMCA 55, ¶8, 125 N.M. 103.

In the Matter of the Protest of Hearing Through Hypnosis, page 10 of 14
outstanding tax liability exceeding $25.00 under Section 7-1-17 of the Tax Administration Act.

Moreover, the Department is obligated to pursue an outstanding tax liability under the anti-

donation clause of the New Mexico Constitution, Article IX, §14. Perhaps it is because of these

obligations that the application of estoppel in cases involving taxation are disfavored.

In this case, there is very little evidence related to Taxpayer’s assertions that she was told

her liability was forgiven. Assuming for argument that such oral statements were made to

Taxpayer, those statements were not reduced to writing. Considering a formal, written notice of

assessment had been issued in this matter, it is not reasonable to rely on an oral statement of

employee that the liability was extinguished in the absence of a written statement. Estoppel does

not apply in this matter.

Penalty and Interest.

Taxpayer argued that she should not be held liable for interest in this matter considering that

her protest unnecessarily languished in the Department’s Protest Office for two years. Taxpayer

does not cite any legal authority to support this proposition. The general rule is that tardiness of

public officers in the performance of statutory duties is not a defense to an action by the state to

enforce a public right or protect public interest. See Ranchers-Tufco Limestone v. Revenue, 1983-

NMCA-126, ¶13, 100 NM 632.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute,

regardless of the reason for non-payment of the tax, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See Marbob Energy Corp., ¶22. The language of Section 7-1-67 also makes it clear that

In the Matter of the Protest of Hearing Through Hypnosis, page 11 of 14
interest begins to run from the original due date of the tax until the tax principal is paid in full. The

Department has no discretion under Section 7-1-67 and must assess interest against Taxpayer from

the time the 2006 gross receipts was due but not paid until Taxpayer satisfies the gross receipts tax

principal.

Further, the Department has no basis to abate civil negligence penalty under NMSA 1978,

Section 7-1-69 (2007) in this case. When a taxpayer fails to pay taxes due to the State because of

negligence or disregard of rules and regulations, but without intent to evade or defeat a tax, by its

use of the word “shall”, Section 7-1-69 requires that civil penalty be added to the assessment. As

discussed above, the statute’s use of the word “shall” makes the imposition of penalty mandatory

in all instances where a taxpayer’s actions or inactions meets the legal definition of “negligence.”

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

Erroneous belief and inadvertent error meets the legal definition of “negligence” under the penalty

statute. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-

070, ¶10, 108 N.M. 795. Under Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127,

¶5, 90 N.M. 16, failure to do reasonable research into what the tax law requires or to meet with a

qualified tax professional “may constitute negligence.”

Here, Taxpayer did not do any research into possible gross receipts tax consequences of her

contract work for Mr. Klehn. Further, despite being given well over the usual 60-day second

chance period to obtain the NTTC, Taxpayer did not present a timely executed NTTC. While

Taxpayer’s inactions were certainly inadvertent and unintentional, this case meets all three

In the Matter of the Protest of Hearing Through Hypnosis, page 12 of 14
definitions of negligence under Regulation 3.1.11.10 NMAC. Moreover, Taxpayer’s lack of

reasonable research into the tax law constitutes civil negligence. See Tiffany Construction Co., ¶5.

Therefore, Taxpayer was properly assessed civil negligence penalty under Section 7-1-69.

Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessment. Jurisdiction lies over the

parties and the subject matter of this protest.

B. In 2006, Taxpayer was a person engaged in business under NMSA 1978, Section 7-

9-4 (2002). Therefore, all of Taxpayer’s receipts in 2006 are presumed subject to gross receipts tax

under NMSA 1978, Section 7-9-5 (2002).

C. The deduction for sale of a service for resale under NMSA 1978, Section 7-9-48

(2000) does not apply to Taxpayer’s counseling services because there is no evidence that the resale

of those services by Mr. Klehn was subject to gross receipts tax.

D. Taxpayer did not possess the requisite NTTC to support the claimed deduction for

the sale of a service for resale under NMSA 1978, Section 7-9-48 (2000) at the time the 2006 CRS

returns were due and did not possess the requisite NTTC within 60-days of the Department’s Notice

of Audit.

E. Under NMSA 1978, Section 7-9-43 (2011), without possession of a timely executed

NTTC at either the time of the filing of returns or within 60-days of notice of audit, the Department

is not allowed to grant and Taxpayer is not entitled to the claimed deduction. See Marbob Energy

Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the word

“shall” in a statute indicates provision is mandatory absent clear indication to the contrary). See also

Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-042, ¶22, 107 N.M.

In the Matter of the Protest of Hearing Through Hypnosis, page 13 of 14
392 (Court found it valid for the Department to deny a claimed deduction when taxpayer did not

timely present a requisite NTTC).

F. Taxpayer could not reasonably rely on the alleged oral statements of Department

employees extending the 60-day, second chance NTTC deadline as a basis for equitable relief. See

Kilmer v. Goodwin, 2004 NMCA 122, ¶28, 136 N.M. 440.

G. Taxpayer could not reasonably rely on the alleged oral statements of Department

employees informing her that her liability had been forgiven because such statement is contrary to

the requirements of Section 7-1-17 and the anti-donation clause of the New Mexico Constitution,

Article IX, §14. See Kilmer v. Goodwin, 2004 NMCA 122, ¶28, 136 N.M. 440. See also Rainaldi

v. Public Employees Retirement Board, 1993-NMSC-028, ¶18-19, 115 N.M. 650.

H. Since there is no evidence that someone else paid gross receipts tax on behalf of

Taxpayer, equitable recoupment under NMSA 1078, Section 7-1-28 (F) (2013) does not apply.

I. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

J. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty.

For the foregoing reasons, Taxpayer’ protest IS DENIED. As of the date of hearing,

Taxpayer owed $4,122.85 in gross receipts tax, $924.17 in penalty, and $1,875.71 in interest for a

total outstanding liability of $6,922.73.

DATED: March 31, 2014.

Brian VanDenzen, Esq.,
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630
In the Matter of the Protest of Hearing Through Hypnosis, page 14 of 14