Could locksmith That’s the Key avoid penalty and interest because it honestly believed re-keying receipts from Fannie Mae and Freddie Mac were tax-exempt?

Plain-English summary

That’s the Key owed penalty and interest because its unsupported belief that Fannie Mae and Freddie Mac receipts were exempt was civil negligence. The family locksmith business had already conceded and paid $1,574.21 of gross receipts tax; the AHO upheld the remaining $554.58.

That’s the Key performed re-keying services for realtors and real estate companies. A federal Schedule C mismatch showed receipts from Fannie Mae and Freddie Mac that had not been reported on New Mexico CRS returns.

The business believed those entities were government agencies whose payments were exempt. It did not intentionally or willfully avoid tax, and it paid the principal before the hearing.

An honest belief was still negligence without investigation

Regulation 3.1.11.10 defined negligence to include failure to act, inadvertence, and erroneous belief. New Mexico's self-reporting system placed the duty on the business to determine its tax consequences.

That’s the Key did not consult a tax professional, accountant, Department employee, statute, or regulation before excluding the receipts. Its lack of knowledge therefore did not overcome the negligence penalty.

The mistake-of-law exception required reasonable grounds

Section 7-1-69(B) protected a good-faith mistake of law made on reasonable grounds. The AHO found no informed judgment or consultation supporting the claimed exemption, so that exception did not apply.

The decision did not need to adjudicate principal tax because That’s the Key acknowledged it and paid it. The only disputed issues were the additions.

Interest ran until principal was paid

Section 7-1-67 made interest mandatory from the original due date until principal tax was paid, regardless of the reason for nonpayment. Paying before the hearing stopped further principal-based accrual but did not erase prior interest.

Result: protest DENIED. Penalty of $326.57 and interest of $228.01 remained due, totaling $554.58.

What this means for you

Vendors serving government-linked entities

Do not infer a New Mexico gross receipts exemption from a customer's name or federal relationship. Identify the exact statutory exemption or deduction before excluding receipts.

Small family businesses

Operating without an outside accountant does not reduce the self-reporting duty. Document how each recurring customer class is treated and why.

Taxpayers seeking mistake-of-law relief

Show the informed analysis or professional guidance relied on before the return was due. A sincere but unresearched assumption may still be negligence.

Common questions

Q: What services generated the receipts?
A: Re-keying services performed for Fannie Mae and Freddie Mac.

Q: Did That’s the Key dispute principal tax at the hearing?
A: No. It conceded and paid the $1,574.21 principal before the hearing.

Q: Was the nonpayment intentional?
A: No. The AHO found an honest erroneous belief rather than willful evasion.

Q: Why did penalty remain?
A: The business did not investigate or obtain informed advice supporting its exemption belief.

Q: What additions were upheld?
A: $326.57 of penalty and $228.01 of interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17, 7-1-67, and 7-1-69 — assessment presumption, mandatory interest, negligence penalty, and mistake-of-law exception
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence definitions and nonnegligence indicators
• Regulation 3.1.6.13 NMAC — presumption for penalty and interest

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine possible tax consequences
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertence and erroneous belief as negligence
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — informed consultation required for reasonable mistake of law
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory statutory language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: That’s the Key
• Decision PDF: D&O 16-04

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
THAT’S THE KEY No. 16-04
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1370695728

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on January 11, 2016 before

Brian VanDenzen, Esq., Interim Chief Hearing Officer, in Santa Fe. At the hearing, Stephanie

and Max Blea appeared for That’s the Key (“Taxpayer”). Acting Chief Legal Counsel Julia

Belles appeared representing the State of New Mexico Taxation and Revenue Department

(“Department”). Protest Auditor Veronica Galewaler appeared as a witness for the Department.

Department Exhibits A-E were admitted into the record. All exhibits are more thoroughly

described in the Administrative Exhibit Coversheet. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On October 7, 2015, under letter id. no. L1370695728, the Department assessed

Taxpayer for $1,574.21 in gross receipts tax, $314.84 in penalty, and $221.43 in interest for the

CRS reporting periods between January 1, 2009 and December 31, 2011. [Dept. Ex. A].

2. On October 9, 2015, Taxpayer protested the Department’s assessment, asking that

the Department “remove the penalty and interest” portion of the assessment. [Dept. Ex. B].

3. On October 20, 2015, the Department’s protest office acknowledged receipt of a

valid protest. [Dept. Ex. C].

4. On November 23, 2015, the Department filed a request for hearing in this matter

with the Administrative Hearings Office.

5. On November 24, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on January 11, 2016, within

90-days of the Department’s acknowledgment of receipt of a valid protest.

6. Taxpayer is a family-run locksmith business that performs re-keying services for

realtors and other real estate companies.

7. Mr. Max Blea is the locksmith while his wife Ms. Stephanie Blea manages the

books and billings of the business. Taxpayer did not use any other bookkeeper or accountant

during the relevant period.

8. Through its Schedule C mismatch program with the IRS, the Department detected

that Taxpayer had reported business income on its Federal Schedule C that was not reported on

its CRS returns in New Mexico.

9. During the assessed period, Taxpayer performed re-keying services for Fannie

Mae and Freddie Mac.

10. Taxpayer’s income from Freddie Mac and Fannie Mae receipts was the

discrepancy discovered by the Department between Taxpayer’s CRS filings and federal income

tax returns, which led to the assessment described in finding of fact #1.

11. Ms. Blea believed that Fannie Mae and Freddie Mac were government agencies

exempt from paying gross receipts tax.

12. Taxpayer did not consult with any tax professionals or the Department about its

tax obligations vis-à-vis the Freddie Mac and Fannie Mae receipts and whether its receipts from

those entities were exempt.

In the Matter of the Protest of That’s the Key, page 2 of 8

13. Taxpayer did not pay gross receipts taxes when due on its Freddie Mac and

Fannie Mae receipts.

14. Taxpayer did not intentionally or willfully fail to pay the gross receipts tax on the

Freddie Mac and Fannie Mae receipts; rather, Taxpayer erroneously believed that it did not have

to pay gross receipts tax on its Freddie Mac and Fannie Mae receipts.

15. Taxpayer acknowledged in its protest letter and at hearing that it was liable for the

assessed gross receipts tax principal, leaving only the assessed penalty and interest at issue in this

protest.

16. Taxpayer paid the assessed gross receipts tax principal before the protest hearing.

17. As of the date of hearing, Taxpayer owed $326.57 in penalty and $228.01 in

interest for a total outstanding liability of $554.58. [Dept. Ex. A].

DISCUSSION

Taxpayer agrees that it owed the assessed tax principal and made payment extinguishing

that liability before the hearing. The only remaining issues are the Department’s assessment of

civil negligence penalty under NMSA 1978, Section 7-1-69 (2007) and interest under NMSA

1978, Section 7-1-67 (2007).

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. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

In the Matter of the Protest of That’s the Key, page 3 of 8
interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

Interest.

Taxpayer conceded that it owed the assessed gross receipts tax principal in this case, which

was not paid when initially due. 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. v. N.M. Oil Conservation Comm'n,

2009-NMSC-013, ¶22, 146 N.M. 24. 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. In

this case, the Department has no discretion under Section 7-1-67 and must assess interest against

Taxpayer from when the tax was originally due until Taxpayer paid the gross receipts tax principal

in this matter.

Penalty.

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, NMSA 1978 Section 7-1-69

(2007) requires that

there shall be added to the amount assessed a penalty in an amount equal
to the greater of: (1) two percent per month or any fraction of a month
from the date the tax was due multiplied by the amount of tax due but not
paid, not to exceed twenty percent of the tax due but not paid.

(italics added for emphasis).

In the Matter of the Protest of That’s the Key, page 4 of 8
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.” See Marbob

Energy Corp , ¶22 (use of the word “shall” in a statute indicates provision is mandatory absent clear

indication to the contrary).

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.” In this

case, Taxpayer was negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer

failed to take action to report and pay gross receipts on its filed CRS system returns for the Fannie

Mae and Freddie Mac receipts because of its erroneous belief that they were exempt.

Taxpayer’s main argument for the abatement of penalty is that it was simply unaware of

the requirement that it had to pay gross receipts tax on the services it rendered to Fannie Mae and

Freddie Mac. As found at the hearing, Taxpayer failure to pay the gross receipts tax in this

instance stems from an honest lack of knowledge of the requirements rather than from any

willful intent to evade or defeat the tax. However, 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. Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M.

16. In New Mexico a lack of knowledge of the requirements of taxation, inadvertent error, and/or

erroneous belief constitutes the civil negligence subject to penalty under Section 7-1-69. See El

Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M.

795 (inadvertent error constitutes civil negligence).

In the Matter of the Protest of That’s the Key, page 5 of 8
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.” Here, there is no evidence that

Taxpayer made an informed judgment or determination based on reasonable grounds that gross

receipts tax did not apply to the Freddie Mac and Fannie Mae receipts. Taxpayer did not consult

with any tax professional, accountant, Department employee, statute, or regulation before

deciding that no taxes were due on the Fannie Mae and Freddie Mac receipts. See C & D Trailer

Sales v. Taxation and Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where

there was no evidence that the taxpayer “relied on any informed consultation” in deciding not to

pay tax). Consequently, this mistake of law provision of Section 7-1-69 (B) does not mandate

abatement of penalty in this case. The other grounds for abatement of civil negligence penalty

are found under Regulation 3.1.11.11 NMAC, none of which are applicable to the facts of this

protest. The Department’s assessment of penalty and interest in this matter was appropriate and

Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Taxpayer did not overcome the presumption of correctness on the assessed penalty

and interest under NMSA 1978, Section 7-1-17 (C) (2007), NMSA 1978, §7-1-3 (X) (2013),

Regulation 3.1.6.13 NMAC, and Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

In the Matter of the Protest of That’s the Key, page 6 of 8
D. Under NMSA 1978, Section 7-1-67 (2007)’s mandatory “shall” lanuage,

Taxpayer is liable for accrued interest under the assessment. See Marbob Energy Corp. v. N.M.

Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24.

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

penalty because Taxpayer’s inaction and erroneous belief in not paying the assessed gross receipts

tax met the definition of civil negligence under Regulation 3.1.11.10 NMAC. See El Centro Villa

Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M. 795.

F. Taxpayer did not establish a good faith, mistake of law made on reasonable grounds

that would allow for abatement of penalty under Section 7-1-69 (2007).

G. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

Taxpayer is liable for the assessed penalty and interest totaling $554.58.

DATED: February 10, 2016.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of That’s the Key, page 7 of 8
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), 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 Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of That’s the Key, page 8 of 8