Could New Mexico calculate withholding penalties on tax that was paid late but fully paid before the Department issued its assessments?

Plain-English summary

Exerplay's six monthly withholding penalties were reduced to the five-dollar minimum because the company had paid almost all tax before the Department issued its assessments. Only $0.02 remained outstanding, so total penalty was $30.00, while interest remained due.

Exerplay timely filed its May through October 2013 returns and accurately reported the withholding liabilities. A payroll contractor believed the accountant paid the tax when returns were filed, while the company intended the contractor to make payment through payroll. The resulting miscommunication left the tax unpaid.

Exerplay later audited its accountants, noticed excess cash in the payroll account, identified the missed payments, and paid all monthly withholding liabilities in December 2013. The Department assessed in January and February 2014.

After confirming payment, the Department reduced each assessed tax amount to zero except September, which retained $0.02.

Penalty was triggered at assessment under the controlling case

The Department had calculated penalty at two percent per month on the amounts that were unpaid between each due date and the December payment.

The AHO applied GEA Integrated Cooling Technologies v. Taxation and Revenue Department, which held that statutory penalty came into existence at the specific time of Department assessment. The percentage formula measured penalty, but did not make it exist from the original due date.

Because the tax outstanding when the assessments issued was either $0.00 or $0.02, the percentage calculation for every month was below the statutory five-dollar minimum. Section 7-1-69 therefore imposed $5.00 per assessment, or $30.00 total.

All penalty above $30 was abated.

Interest remained due

Interest operated differently. Section 7-1-67(A) required interest on tax not paid by the due date to compensate the state for the time value of the unpaid revenue.

Exerplay conceded that interest was appropriate, so the decision did not abate it.

Result: protest GRANTED IN PART and DENIED IN PART. Penalty was reduced to $30.00; interest and the remaining $0.02 tax stood.

What this means for you

Employers

Filing a withholding return does not pay the tax. Assign clear responsibility for both filing and payment, and reconcile the payroll cash account each month.

Businesses that discover a missed payment

Prompt self-correction materially changed the penalty base in this decision because the tax was paid before Department assessment. Interest still ran from the due date.

Payroll providers and accountants

Document who initiates tax payments, who confirms acceptance, and who investigates excess account balances. The failure here arose because each participant assumed someone else paid.

Common questions

Q: Were Exerplay's returns late?
A: No. The company filed timely and accurately reported the liabilities; the payments were late.

Q: How much tax remained when the Department assessed?
A: Only $0.02 for September 2013; the other monthly balances had been paid.

Q: Why was each penalty five dollars?
A: The percentage of zero or two cents was less than the statutory minimum, so the greater five-dollar amount applied.

Q: Was interest also reduced?
A: No. Exerplay conceded interest, and the statute required it from the original payment due dates.

Citations and references

Statutes:

• NMSA 1978, §§ 7-1-17 and 7-1-30 — assessment and concurrent penalty collection
• NMSA 1978, § 7-1-69(A), (E) — percentage and minimum penalty; payment after assessment
• NMSA 1978, § 7-1-67(A) — mandatory interest

Cases cited:

• GEA Integrated Cooling Technologies v. Taxation and Revenue Department, 2012-NMCA-010 — penalty triggered at Department assessment
• Sonic Industries v. State, 2000-NMCA-087, reversed on other grounds, 2006-NMSC-038 — taxpayer self-assessment did not have the same effect as Department assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Exerplay Inc.
• Decision PDF: D&O 14-27

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
EXERPLAY, INC., No. 14-27
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0972088784, L1751672272, L2045830608,
L0099673552, L1173415376, and L0636544464

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 22, 2014, before Dee

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

represented by Mr. Peter Breen, Staff Attorney. Ms. Mary Griego, Auditor, also appeared on

behalf of the Department. Mr. Ray Jecklin, a contract employee of Exerplay, Inc. (Taxpayer),

appeared for the hearing and represented the Taxpayer. 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. On February 12, 2014, the Department assessed the Taxpayer for withholding tax,

penalty, and interest for the tax period ending on May 31, 2013. The assessment was for

$0.00 tax, $117.06 penalty, and $14.19 interest. [L0972088784]

2. On January 17, 2014, the Department assessed the Taxpayer for withholding tax, penalty

and interest for the tax period ending on June 30, 2013. The assessment was for $625.62

tax, $189.36 penalty, and $21.98 interest. [L1751672272]

3. On February 12, 2014, the Department assessed the Taxpayer for withholding tax,

penalty, and interest for the tax period ending July 31, 2013. The assessment was for

$0.00 tax, $154.52 penalty, and $17.30 interest. [L2045830608]

4. On February 12, 2014, the Department assessed the Taxpayer for withholding tax,

penalty, and interest for the tax period ending August 31, 2013. The assessment was for

$0.00 tax, $130.83 penalty, and $14.16 interest. [L0099673552]

5. On February 12, 2014, the Department assessed the Taxpayer for withholding tax,

penalty, and interest for the tax period ending September 30, 2013. The assessment was

for $0.02 tax, $97.44 penalty, and $9.81 interest. [L1173415376]

6. On February 12, 2014, the Department assessed the Taxpayer for withholding tax,

penalty, and interest for the tax period ending October 31, 2013. The assessment was for

$0.00 tax, $65.27 penalty, and $4.83 interest. [L0636544464]

7. On March 6, 2014, the Taxpayer filed a formal protest letter.

8. On March 31, 2014, the Taxpayer filed an information authorization form for Mr. Jecklin

and another contract employee and indicated that the protest and hearing paperwork

should be sent to Mr. Jecklin.

9. On April 2, 2014, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

10. On April 3, 2014, the Hearings Bureau issued notice of hearing. The hearing date was set

within ninety days of the protest.

11. In mid May 2013, the Taxpayer hired Mr. Jecklin as a contract employee, and he was

placed in charge of the Taxpayer’s payroll.

Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 2 of 8

12. Mr. Jecklin was aware that the Taxpayer was filing its monthly gross receipts and

withholding returns timely.

13. Mr. Jecklin believed that the accountant was supposed to pay the monthly withholding

and gross receipts tax when the returns were filed.

14. The Taxpayer intended for Mr. Jecklin to handle the payment of its withholding tax

through its payroll process.

15. Withholding taxes were not paid by the Taxpayer from May through October 2013 due to

this miscommunication.

16. The Taxpayer was filing its monthly returns and was reporting its tax liability accurately

for those months.

17. The Taxpayer audited its accountants and discovered that there was too much money in

the payroll account. The Taxpayer worked with Mr. Jecklin and its accountant to figure

out why there were excess funds in the payroll account.

18. The Taxpayer realized that the withholding tax payments had not been made for several

months. In December 2013, the Taxpayer paid all of the withholding tax liabilities for

those months.

19. In January and February 2014, the Department assessed the Taxpayer with tax, penalty,

and interest for those months.

20. The Department abated the tax and adjusted the penalty and interest from the assessment

for the tax period ending June 30, 2013 when it confirmed that the tax had already been

paid at the time of the assessment. Therefore, the only assessment with any outstanding

tax liability is for the tax period ending September 30, 2013. The amount of tax still

outstanding is $0.02.
Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 3 of 8

21. The Taxpayer argued that the penalty was too steep and inappropriate. The Taxpayer

argued that it was the first time it made a mistake like this, that it discovered and

corrected the mistake on its own, and that the penalty was too severe. The Taxpayer

conceded that interest was appropriate.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for penalty for the tax periods

from May 2013 through October 2013.

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 Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. 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 it is entitled

to an abatement of penalty.

Assessment of Penalty.

The Taxpayer argued that the penalty assessed was too steep. The Taxpayer argued that a

lesser penalty should have been imposed in light of the circumstances. The Department argued

that the Taxpayer was negligent and that the penalty was appropriate because the Taxpayer failed

to pay its withholding tax when it was due.

Penalty is added to the amount assessed when a tax is not paid when it is due. See

NMSA 1978, § 7-1-69 (2007). Generally, an assessment is effective when a taxpayer files a

return showing a tax liability. See NMSA 1978, § 7-1-17 (2007). Generally, penalty may be
Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 4 of 8
collected concurrently with the tax due without assessment or separate proceedings. See NMSA

1978, § 7-1-30. However, recent caselaw has found that penalty does not come into existence

when the due date occurred and the tax liability remained unpaid. See Gea Integrated Cooling

Tech. v. State Taxation and Revenue Dep’t., 2012-NMCA-010, ¶ 8. Penalty is added to the

amount assessed by the Department, and “assessment is the specific point in time that the

statutory penalty is triggered and thereby applied.” Id. at ¶ 9. The statutory formula for

calculating percentage of penalty from the time of the tax due date is merely a mathematical

formula and does not mean that penalty began on the due date. See id.

A taxpayer’s self-assessment does not have the same effect as an assessment by the

Department. See Sonic Indus. v. State, 2000-NMCA-087, ¶ 35, 129 N.M. 657 (holding that the

statute of limitations would be meaningless if the taxpayer’s self-assessment had the same effect

as an assessment by the Department), rev’d on other grounds Sonic Indus. v. State, 2006-NMSC-

038, 140 N.M. 212. Penalty applies at the specific time of the assessment by the Department.

See Gea Integrated Cooling Tech., 2012-NMCA-010, ¶ 9. The amount of tax assessed to the

Taxpayer by the Department for each month other than June and September 2013 was $0.00.

The assessment for June 2013 was later adjusted to $0.00 since the Taxpayer had already paid

the tax prior to the assessment. For September 2013, the amount was $0.02. The Department

assessed penalty using the mathematical formula of two percent per month from the due date of

the tax until it was paid in December 2013. See NMSA 1978, § 7-1-69 (A) (1) (2007).

However, penalty was not triggered until the assessments were made, and there was no tax

liability outstanding at the time of the assessments except for $0.02 for September. Therefore,

the amount of penalty assessed is incorrect.

Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 5 of 8
The purpose of applying a penalty is to deter and to punish. See Gea Integrated Cooling

Tech., 2012-NMCA-010, ¶ 13. Penalty seeks to deter taxpayers from failing to pay or to file, and

punishes the failure to do so. See id. at ¶ 14. Having a penalty that increases in amount for up to

a certain number of months is designed to encourage taxpayers to pay off their obligations

sooner. See id. Even under the statute, when a taxpayer promptly pays an assessment, no

additional penalty is applied between the time of the assessment and the time of the payment.

See NMSA 1978, § 7-1-69 (E). By applying the penalty to the amount of the tax outstanding at

the time of the assessment, the Department is able to maximize the amount of penalty owed on

unpaid taxes in a manner consistent with the purpose of punishing taxpayers for unpaid taxes.

See Gea Integrated Cooling Tech., 2012-NMCA-010, ¶ 14. However, the statute provides for a

$5.00 penalty even when the tax is paid. See NMSA 1978, § 7-1-69.

Penalty is to be added to the amount assessed in an amount equal to the greater of either

two percent of the amount of tax due but not paid on time or a minimum of $5.00. See NMSA

1978, § 7-1-69 (A) (2007). Penalty is applied at the time of the assessment by the Department.

See Gea Integrated Cooling Tech., 2012-NMCA-010. Since penalty applies to the assessment

made by the Department, the penalty in this case applies to $0.00 and $0.02. Two percent of

$0.00 and of $0.02 is less than $5.00. Therefore, the greater penalty of $5.00 should apply. See

NMSA 1978, § 7-1-69.

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, 1977-NMSC-010, ¶ 4, 90 N.M. 103. The

assessment of interest is not designed to punish taxpayers, but to compensate the state for the
Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 6 of 8
time value of unpaid revenues. Because the tax was not paid when it was due, interest was

properly assessed. The Taxpayer also conceded that interest was appropriate.

CONCLUSIONS OF LAW

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

withholding tax, penalty, and interest for the tax periods from May through October 2013 issued

under respective Letter ID numbers L0972088784, L1751672272, L2045830608, L0099673552,

L1173415376, and L0636544464, and jurisdiction lies over the parties and the subject matter of this

protest.

2. The Taxpayer conceded that it owed interest.

3. Penalty was improperly assessed on the amount of tax that was unpaid when it was

due rather than the amount of tax unpaid at the time of the assessment.

4. Because the tax liability at the time of the assessment was $0.00 or $0.02 in every

month assessed, the greater penalty was $5.00. Therefore, the total amount of penalty owed is $5.00

for each assessment, which is a total of $30.00.

5. Penalty assessed in excess of $30.00 is HEREBY ABATED.

For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART and is DENIED

IN PART.

DATED: July 2, 2014.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 7 of 8
Santa Fe, NM 87504-0630

Exerplay, Inc.
Letter ID Nos. L0972088784, L1751672272, L2045830608
L0099673552, L1173415376, and L0636544464
page 8 of 8