Could a nail technician paid on Forms 1099 deduct services resold by salons when the salons issued NTTCs after the audit deadline?

Plain-English summary

Thu Hong Nguyen could not deduct her manicure-service receipts because the salons delivered their NTTCs after the statutory audit deadline. The decision also found that she was an independent contractor—not an employee—and that she did not prove the salons had already paid the same tax.

Nguyen provided manicures at Envy Spa and Nails in 2008 and 2009 and, on a limited basis, at Tammy's Nail & Spa in 2009. She received a percentage commission for each manicure.

The salons withheld no taxes, paid no unemployment contributions, and provided no workers' compensation coverage. They reported $19,203.48 of 2008 and $20,024.05 of 2009 nonemployee compensation on Forms 1099-MISC. Nguyen also reported Schedule C business income federally but filed no New Mexico gross receipts tax returns.

She was an independent contractor

Employee wages were exempt, but the regulatory classification factors pointed the other way. Nguyen received commissions rather than wages or salary, the salons provided none of the usual payroll or employment protections, and both treated her as a nonemployee. She also determined her schedule at Tammy's.

Because the evidence satisfied every classification factor addressed at the hearing, the decision treated Nguyen as a person engaged in business whose receipts were presumed taxable.

The NTTCs arrived too late

Nguyen did perform services that the salons resold. But Section 7-9-48 conditioned the resale deduction on delivery of an NTTC.

The Department's June 25, 2012 audit notice gave Nguyen 60 days—through August 24—to obtain the certificates. Department employees also told her twice by telephone in July that she needed an NTTC.

Nguyen produced no certificate by the deadline. Envy and Tammy's did not execute Type 5 NTTCs until February 26, 2013, more than five months late and after the Department had assessed her.

The decision acknowledged Nguyen's language barrier and reliance on a friend for help, but said the mandatory deadline left the Department no authority to accept late certificates.

She did not prove equitable recoupment

Nguyen testified that Envy's owner said the salon had already paid “sales tax.” The owner did not testify, and Nguyen offered no return, statement, or other proof of payment.

She also did not establish that tax had been imposed on the same event under inconsistent theories or that she and the salon had the required identity of interest. Equitable recoupment therefore did not support abatement.

Penalty and interest remained

Failing to obtain NTTCs either when the returns were due or during the 60-day audit window was inaction and inattention supporting negligence penalty. Reliance on a friend who was not shown to be qualified tax counsel or an accountant did not establish reasonable cause.

Interest was mandatory from the original due dates until principal was paid.

Result: protest DENIED. At the hearing, Nguyen owed $1,712.44 for 2008 and $1,800.62 for 2009, totaling $3,513.06, with interest accruing at $0.21 per day.

The final order prints the 2008 principal as “$1,224.76.85.” The original assessment and the order's stated $1,712.44 total both reconcile to $1,224.76, indicating that the extra “.85” is a typographical error.

What this means for you

Independent salon professionals

Commission pay and Forms 1099 can create direct gross receipts tax obligations even when the salon charges the end customer and may separately report tax.

Service providers using resale deductions

Obtain the correct NTTC when the return is due. An audit notice may provide a final 60-day opportunity, but a certificate executed after that deadline did not preserve the deduction here.

Taxpayers claiming someone else paid the tax

Bring records proving payment on the same transaction and each element of equitable recoupment. A secondhand statement from the other business was insufficient.

Common questions

Q: Why wasn't Nguyen treated as an employee?
A: The salons paid commissions, issued Forms 1099-MISC, made no payroll withholdings or unemployment contributions, and provided no workers' compensation coverage.

Q: Did the services otherwise qualify as services for resale?
A: The decision recognized that they were performed for resale, but the statutory deduction also required a timely NTTC.

Q: Could the Department excuse lateness because of a language barrier?
A: No. The decision said the reason for missing the mandatory 60-day deadline did not change the result.

Q: Was salon payment of gross receipts tax proven?
A: No. Nguyen had only her testimony about what one owner told her and supplied no corroborating records.

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, § 7-9-17 and Regulation 3.2.105.7(A) NMAC — employee-wage exemption and classification criteria
• 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, § 7-1-28(F) — equitable recoupment
• NMSA 1978, §§ 7-1-67 and 7-1-69 and Regulations 3.1.11.10 and 3.1.11.11(D) NMAC — interest and negligence penalty

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
• Teco Investments v. Taxation and Revenue Department, 1998-NMCA-055 — elements of equitable recoupment
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — erroneous belief and taxpayer responsibility

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Thu Hong Nguyen
• Decision PDF: D&O 14-20

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
THU HONG NGUYEN No. 14-20
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO.’s L1860748096 and L1617460544

DECISION AND ORDER

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

VanDenzen, Esq., Hearing Officer, in Santa Fe. Thu Hong Nguyen (“Taxpayer”) appeared pro

se. Mr. Nhan Dang appeared to assist Taxpayer with interpretation from Vietnamese to English

and English to Vietnamese and was administered the interpreter’s oath. Staff Attorney Peter

Breen appeared representing the State of New Mexico, Taxation and Revenue Department

(“Department”). Protest Auditor Mary Griego appeared as a witness for the Department.

Taxpayer Exhibits #1-4 and Department Exhibits A-C 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 February 1, 2013, the Department assessed Taxpayer for $1,224.76 in gross

receipts tax, $244.95 in penalty, and $196.22 in interest for a total assessment of $1,665.90 for

the combined reporting period ending on December 31, 2008. [Letter id. no. L1860748096].

2. On February 1, 2013, the Department assessed Taxpayer for $1,331.40 in gross

receipts tax, $266.28 in penalty, and $152.39 in interest for a total assessment of $1,750.07 for

the combined reporting period ending on December 31, 2009. [Letter id. no. L1617460544].

3. On March 1, 2013, Taxpayer protested the Department’s assessments, asking for

abatement of tax because of Taxpayer’s possession of a nontaxable transaction certificate

(“NTTC”) and because the “gross receipts tax [had] already paid for by the owner of the nails

salon” where Taxpayer worked.

4. On March 11, 2013, the Department acknowledged receipt of Taxpayer’s protest.

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

Hearings Bureau.

6. On November 4, 2013, the Department again requested a hearing in this matter

with the Hearings Bureau.

7. On November 4, 2013, the Hearings Bureau sent Notice of Administrative

Hearing, scheduling this matter for a hearing on May 5, 2014.

8. Taxpayer worked as an independent contractor and not an employee for Envy Spa

and Nails in 2008 providing manicure services for resale.

9. Taxpayer worked as an independent contractor and not an employee for Envy Spa

and Nails in 2009 providing manicure services for resale.

10. Taxpayer also worked as an independent contractor and not an employee for

Tammy’s Nail & Spa on a limited basis in 2009 providing manicure services for resale.

11. Taxpayer received a commission percentage for each manicure she provided to

Envy Spa and Nails and Tammy’s Nail & Spa.

12. Envy Spa and Nails and Tammy’s Nail & Spa did not withhold any taxes from

Taxpayer’s checks, did not pay unemployment insurance contributions for Taxpayer, and did not

provide any worker’s compensation insurance coverage to Taxpayer.

In the Matter of the Protest of Thu Hong Nguyen, page 2 of 15

13. In 2008, Envy Spa and Nails did not consider Taxpayer an employee. Instead,

Envy Spa and Nails issued Taxpayer a 1099-Misc listing $19,203.48 in nonemployee

compensation in 2008. [Taxpayer Ex. #3].

14. In 2009, Envy Spa and Nails did not consider Taxpayer an employee. Instead,

Envy Spa and Nails issued Taxpayer a 1099-Misc listing $17,792.05 in nonemployee

compensation in 2009. [Taxpayer Ex. #4].

15. In 2009, Tammy Nails & Spa did not consider Taxpayer an employee. Instead,

Tammy Nails & Spa issued Taxpayer a 1099-Misc listing $2,232.00 in nonemployee

compensation in 2009. [Taxpayer Ex. #4].

16. The Department detected that Taxpayer had reported Schedule C business income

to the IRS in 2008 and 2009 but did not file or pay any gross receipts tax in those years.

17. On June 25, 2012, as a result of the Schedule C income and gross receipts

discrepancy, the Department issued Taxpayer a Notice of Limited Scope Audit Commencement

informing Taxpayer that she had 60-days, until August 24, 2012, to produce any NTTCs

supporting a claimed deduction. [Department Ex. A].

18. On July 17, 2012, Taxpayer called the Department about the Notice of Limited

Scope Audit. The Department employee noted that during the conversation he or she asked

Taxpayer for a NTTC. Taxpayer asked Department employee to speak with her son because her

son spoke better English. [Department Ex. B].

19. On July 30, 2012, Taxpayer called the Department and asked the Department

employee to speak with another individual with her during the call. The Department employee

told Taxpayer that she needed to request a NTTC. [Department Ex. B].

20. Taxpayer did not produce any NTTCs executed by August 24, 2012.

In the Matter of the Protest of Thu Hong Nguyen, page 3 of 15

21. On September 14, 2012, Taxpayer provided the Department copies of her 2008

and 2009 1099-Misc, but did not provide any NTTCs.

22. In the absence of NTTCs, the Department issued its assessments to Taxpayer on

February 1, 2013.

23. On February 26, 2013, after the August 24, 2012 deadline and after the

Department issued its assessments to Taxpayer, Tammy’s Nail & Spa and Envy Spa & Nails

executed Type 5 NTTCs to Taxpayer. [Taxpayer Ex. #’s 1-2].

24. The Type 5 NTTCs that Taxpayer produced were not timely.

25. Based on the statements of Envy Spa & Nails’ owner to her, Taxpayer believed

that Envy Spa & Nails paid the gross receipts tax on the manicure jobs Taxpayer performed.

However, the owner of Envy Spa & Nails did not appear to testify and Taxpayer did not present

any other evidence that the gross receipts tax were paid.

26. As of the date of hearing, for 2008, Taxpayer owed $1,224.76.85 in gross receipts

tax, $244.95 in penalty, and $242.73 in interest for a total 2008 liability of $1,712.44. In 2009,

Taxpayer owed $1,331.40 in gross receipts tax, $266.28 in penalty, and $202.94 in interest for a

total 2009 liability of $1,800.62. As of the date of hearing, Taxpayer had a total outstanding

liability of $3,513.06, with interest accruing at $0.21 per day. [Department Ex. C].

DISCUSSION

In light of the protest letter, the evidence presented at hearing, and the arguments made at

hearing, there are three main issues in this protest. The first issue is whether Taxpayer worked as

an independent contractor or as an employee for Envy Spa & Nails in 2008 and 2009 and

Tammy’s Nail & Spa in 2009. The second issue is whether Taxpayer was entitled to deduction

from gross receipts tax for her sale of manicure services to Envy Spa & Nails and Tammy’s Nail

In the Matter of the Protest of Thu Hong Nguyen, page 4 of 15
& Spa for resale. Although the Department argued that it was not at issue in the protest,

Taxpayer’s protest letter established that the third issue at hearing is whether Taxpayer was

entitled to abatement of tax on equitable recoupment grounds. As will be analyzed below,

because Taxpayer was an independent contractor not an employee, because Taxpayer did not

timely possess the requisite NTTC to support her claimed deduction, and because Taxpayer did

not meet her burden to establish equitable recoupment, Taxpayer’s protest is denied.

Presumption of Correctness.

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

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

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. However, once a taxpayer rebuts the

presumption of correctness, the burden shifts to the Department to show the correctness of the

assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA 21, ¶13, 133 N.M.

217.

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. Because Taxpayer is claiming a deduction from gross receipts tax,

Taxpayer must establish her right to claim the deduction.

Gross Receipts Tax, the Deduction, 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

In the Matter of the Protest of Thu Hong Nguyen, page 5 of 15
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, Taxpayer referenced a couple of times in her testimony that she worked for

Envy Spa & Nails and Tammy’s Spa & Nails. It was unclear whether Taxpayer was arguing, based

on her testimony that she worked for the salons, that she was an employee rather than an

independent contractor with those businesses. Nevertheless, the issue will be briefly addressed out

of an abundance of caution.

Exempted from gross receipts taxes are the wages of employees. See NMSA 1978, § 7-9-17.

Regulation 3.2.105.7 (A) NMAC lists seven criteria for the Department to use in determining

whether a person is an employee for the purposes of the exemption under Section 7-9-17. Applying

those criteria to the facts of this case, Taxpayer was an independent contractor and not an employee.

Taxpayer received commission checks from Envy Spa & Nails and Tammy’s Spa & Nails rather

than wages or a salary. See Regulation 3.2.105.7 (A) (1) NMAC. Envy Spa & Nails and Tammy’s

Spa & Nails did not withhold any taxes from Taxpayer’s checks, did not pay worker’s

compensation insurance, and did not make unemployment insurance payments on behalf of

Taxpayer. See Regulation 3.2.105.7 (A) (2-5) NMAC. As evidenced by the issuance of 1099’s to

Taxpayer listing nonemployee compensation, Envy Spa & Nails and Tammy’s Spa & Nails did not

consider Taxpayer an employee. See Regulation 3.2.105.7 (A) (6) NMAC. At least with respect to

Tammy’s Spa & Nails, Taxpayer determined her schedule. See Regulation 3.2.105.7 (A) (7)

NMAC. Every indicia under Regulation 3.2.105.7 NMAC for which there was evidence presented

during the hearing established by the preponderance that Taxpayer was an independent contractor

In the Matter of the Protest of Thu Hong Nguyen, page 6 of 15
rather than an employee of Envy Spa & Nails and Tammy’s Spa & Nails. Since Taxpayer was an

independent contractor in 2008 and 2009 for the salons rather than an employee, Taxpayer was a

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. One particular deduction is at issue in this protest: the sale of a service for

resale deductable 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. 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 2008 and 2009 performance of manicure services for the

salons. There is no evidence that Taxpayer possessed a NTTC at that time.

In the Matter of the Protest of Thu Hong Nguyen, page 7 of 15
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).

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 25, 2012,

directing Taxpayer to produce a supporting NTTC by the statute’s second chance 60-day deadline,

August 24, 2012. Additionally, the Department twice directed Taxpayer to obtain a NTTC in phone

conversations that occurred in July 2012, before the August 24, 2012 60-day deadline. Taxpayer did

In the Matter of the Protest of Thu Hong Nguyen, page 8 of 15
not meet the August 24, 2012 60-day deadline. The NTTCs that Taxpayer eventually presented

were more than five-months after Section 7-9-43’s strict 60-day second chance provision. While the

language barriers in this matter and Taxpayer’s reliance on a friend to assist her may help explain

Taxpayer’s delay in obtaining the NTTC, the reasons for Taxpayer’s non-compliance with the 60-

days statutory deadline are not material to the analysis under Section 7-9-43. Under Section 7-9-43

and Regulation 3.2.201.12 (C), the Department has no authority to allow a deduction after the

expiration of the second chance, 60-day deadline, even if a taxpayer has a reasonable explanation

for the delay.

By not presenting the NTTCs in a timely manner, as required by Section 7-9-43 and

Regulation 3.2.201.12 (C), Taxpayer waived her right to the claimed deduction. See Proficient Food

Co., ¶22 (internal citations omitted) (“Where a party claiming a right to an exemption or deduction

fails to follow the method prescribed by statute or regulation, he waives his right thereto.”).

Therefore, Taxpayer was not entitled to the sale of a service for resale deduction under Section 7-9-

48 and the Department’s assessment of gross receipts tax in 2008 and 2009 was proper.

Equitable Recoupment.

The Department argued that equitable recoupment under NMSA 1978, Section 7-1-28 (F)

(2013) was not an issue at protest because Taxpayer did not preserve and/or raise that issue.

However, in the third paragraph of Taxpayer’s protest letter, Taxpayer asked for a waiver of her

gross receipts tax liability in 2008 and 2009 “[b]ecause technically her gross receipts tax has already

[been] paid by the owner of the Nails salon.” While Taxpayer did not expressly use the phrase

“equitable recoupment” or cite Section 7-1-28 (F), a reasonable reading of that paragraph places the

parties on notice that Taxpayer believed she should not be liable for taxes already paid by the salon

owners on her services, a sentiment that fairly encompasses the legal concept of equitable

In the Matter of the Protest of Thu Hong Nguyen, page 9 of 15
recoupment. The Court of Appeals generally does “not favor a rule which exhaults form over

substance.” Proficient Food Co., ¶22. And the Department cites no authority that the protest letter

must be read strictly to require a pro se taxpayer to use specific legal phrases in their protest letter in

order to comply with the requirements of NMSA 1978, Section 7-1-24 (2013) even if the substance

of the letter reasonably raised the issue. Taxpayer’s letter was sufficient to place the Department on

notice of the issue and equitable recoupment was a proper subject of the hearing.

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 recoupment are met.” Equitable recoupment in tax matters is a

doctrine developed largely by federal courts and is given a limited application in tax litigation.

See Vivigen, Inc. v. Minzner, 1994-NMCA-027, ¶20, 117 N.M. 224. New Mexico has adopted

equitable recoupment with the same limitations set forth by federal courts. See Vivigen, Inc., ¶23.

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. However, under the presumption of

correctness that attached to Department’s assessments pursuant to Section 7-1-17 (C), Taxpayer

has the burden of establishing that she is entitled to an abatement of assessed taxes under Section

7-1-28 (F)’s equitable recoupment basis.

In this case, the only evidence related to equitable recoupment is Taxpayer’s hearsay

testimony that the owner of Envy Spa & Nails told Taxpayer that she had nothing to worry about

because the owner had already paid the sales tax. The Envy Spa & Nails owner did not appear to

testify at the hearing. Taxpayer had no other evidence that the Envy Spa & Nails owner had paid

gross receipts tax, like a statement from the owner or the owner’s tax return. The Department’s

In the Matter of the Protest of Thu Hong Nguyen, page 10 of 15
protest auditor Mary Griego was unaware of whether the Envy Spa & Nails owner had paid gross

receipts tax. While hearsay evidence is admissible evidence in an administrative proceeding,

without more in this case it is of insufficient weight to find that the Envy Spa & Nails owner had

paid gross receipts tax on the same taxable transaction for which the Department assessed

Taxpayer. Moreover, Taxpayer did not establish that the taxes were assessed on inconsistent

theories or that Taxpayer shared a strict identity of interest with the salon owners. Because

Taxpayer did not present sufficient evidence to establish the elements of equitable recoupment in

this matter, Section 7-1-28 (F) does not provide grounds for the abatement of assessed taxes.

Penalty and Interest.

Taxpayer did not specifically address interest and penalty, but because Taxpayer asked for

abatement of all taxes, interest and penalty will be briefly addressed. 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 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 2008 and 2009 gross receipts tax

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

In the Matter of the Protest of Thu Hong Nguyen, page 11 of 15
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. Here, Taxpayer’s failure to timely obtain a supporting NTTC at the time

when the 2008 and 2009 gross receipts taxes were due, or upon 60-days of the Department’s notice

of audit, constituted negligence under Regulation 3.1.11.10 NMAC because of Taxpayer’s inaction

and inattention

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Further, in relevant part to this

protest, Regulation 3.1.11.11 (D) NMAC (emphasis added) allows for abatement of penalty

when a “taxpayer proves that the failure to pay a tax… was caused by reasonable reliance on the

advice of competent tax counsel or accountant as to the taxpayer’s liability after full disclosure

of all relevant facts.” Black’s Law Dictionary, 22 (9th ed. 2009), defines “accountant” as “a

person authorized under applicable law to practice public accounting.”

In the Matter of the Protest of Thu Hong Nguyen, page 12 of 15
Neither of these exceptions apply to the facts of this case. Upon receipt of the

Department’s Notice of Limited Scope Audit, Taxpayer had a salon owner named Tommy assist

her with working with the Department. There is no evidence that Tommy was a competent tax

accountant or attorney. Taxpayer is unable to avoid penalty because her friend Tommy failed to

follow through in assisting her. See El Centro Villa Nursing Center v. Taxation and Revenue

Department, 1989-NMCA-070, ¶14, 108 N.M. 795 (A taxpayer cannot “abdicate” their tax

responsibilities “ merely by appointing an accountant as its agent in tax matters.”). Ultimately,

Taxpayer had the responsibility to support her claimed deduction by providing a timely executed

NTTC. See Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16

(under New Mexico's self-reporting tax system, “every person is charged with the reasonable duty

to ascertain the possible tax consequences” of his or her actions). By failing to do that, Taxpayer

was liable for the tax and penalty was properly assessed under Section 7-1-69. Taxpayer’s protest

is denied.

CONCLUSIONS OF LAW

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

parties and the subject matter of this protest.

B. In 2008 and 2009, six of the seven criteria under Regulation 3.2.105.7 (A) NMAC

established that Taxpayer was an independent contractor and not an employee.

C. Since Taxpayer, as an independent contractor, was a person engaged in business

under NMSA 1978, Section 7-9-4 (2002), all of Taxpayer’s receipts in 2008 and 2009 are

presumed subject to gross receipts tax under NMSA 1978, Section 7-9-5 (2002).

D. Taxpayer did not possess the requisite NTTCs 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 2008 and

In the Matter of the Protest of Thu Hong Nguyen, page 13 of 15
2009 CRS returns were due and did not possess the requisite NTTCs within 60-days of the

Department’s Notice of Audit. Under NMSA 1978, Section 7-9-43 (2011) and Regulation

3.2.201.12 (C), 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 under Section 7-9-48. 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. 392 (Court found

it valid for the Department to deny a claimed deduction when taxpayer did not timely present a

requisite NTTC).

E. Taxpayer did not establish the elements of equitable recoupment and therefore was

not entitled to an abatement of tax under NMSA 1978, Section 7-1-28 (F).

F. 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.

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

penalty because Taxpayer’s inaction and inattention met the definition of civil negligence under

Regulation 3.1.11.10 NMAC.

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

2008, Taxpayer owed $1,224.76.85 in gross receipts tax, $244.95 in penalty, and $242.73 in

interest for a total 2008 liability of $1,712.44. In 2009, Taxpayer owed $1,331.40 in gross

receipts tax, $266.28 in penalty, and $202.94 in interest for a total 2009 liability of $1,800.62.

Interest continues to accrue at $0.21 per day until the tax principal is satisfied.

In the Matter of the Protest of Thu Hong Nguyen, page 14 of 15
DATED: June 3, 2014.

Brian VanDenzen, Esq.,
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), 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. Either party filing an appeal shall file a courtesy copy of

the appeal with the Hearing Bureau contemporaneous with the Court of Appeals filing so that the

Hearing Bureau can begin to prepare the record proper.

In the Matter of the Protest of Thu Hong Nguyen, page 15 of 15