Could a New Mexico freelance editor avoid a $276.96 negligence penalty because her longtime New York CPA never advised her about gross receipts tax?

Plain-English summary

A freelance editor could not avoid a $276.96 negligence penalty merely because her longtime New York CPA had never told her about New Mexico gross receipts tax. The AHO found that she did not seek or receive informed advice about that tax and denied her protest.

Emily Metzloff lived in New Mexico and edited text for publication on the internet for out-of-state clients during 2012 and 2013. The clients paid her as an independent contractor, issued Forms 1099, and did not withhold taxes or pay unemployment insurance for her.

A Schedule C mismatch showed that she reported the editing income for federal income-tax purposes but did not report it for New Mexico gross receipts tax. The Department assessed $1,384.84 tax, $276.96 penalty, and $123.17 interest. Metzloff paid and did not contest the tax or interest; she challenged only the penalty.

The editing receipts were taxable

Sections 7-9-3.5 and 7-9-4 imposed gross receipts tax on a person engaging in business in New Mexico and receiving money from selling services. Because Metzloff performed editing services while residing in New Mexico, the decision treated the receipts as taxable even though her clients were out of state.

General CPA retention was not reasonable reliance

Metzloff's CPA had prepared her income-tax returns for years, but he was based in New York. Their contact was limited largely to exchanging documents, they never discussed New Mexico gross receipts tax, and she never asked whether he had experience with it.

The CPA's protest letter said that “we were not aware of this tax” and therefore could not advise Metzloff about the required CRS-1 filings. The AHO found that this showed ignorance, not informed professional advice on which she had relied.

Regulation 3.1.11.11(D) NMAC allowed penalty abatement for reasonable reliance on competent tax counsel or an accountant after full disclosure of all relevant facts. Although retaining a licensed CPA met the baseline competency requirement, the evidence did not show actual advice about New Mexico gross receipts tax or reasonable reliance for that purpose.

Ignorance was negligence, not a good-faith legal judgment

The AHO found Metzloff negligent under all three regulatory definitions: she did not exercise ordinary business care, failed to act when action was required, and acted through inadvertence, erroneous belief, or inattention.

Section 7-1-69(B)'s good-faith mistake-of-law exception did not apply because she had made no informed judgment on reasonable grounds that the tax was inapplicable. The absence of bad intent did not eliminate civil negligence.

Result: protest DENIED. The $276.96 negligence penalty remained due.

What this means for you

Freelancers and independent contractors

Serving clients outside New Mexico does not by itself remove receipts from New Mexico gross receipts tax when the services are performed by a business operating in New Mexico. Ask specifically about state gross receipts obligations rather than assuming income-tax filing covers them.

Businesses using an out-of-state accountant

An accountant's general engagement is not enough for penalty relief. Reasonable reliance requires actual advice about the relevant tax, after disclosure of the relevant facts, from a professional competent to address that issue.

Accountants and tax professionals

Document the scope of the engagement and any state-specific advice. Here the retainer and years of income-tax preparation did not establish that the CPA had been asked to analyze New Mexico gross receipts tax.

Common questions

Q: Did Metzloff dispute the gross receipts tax itself?
A: No. She paid and did not protest the $1,384.84 tax or $123.17 interest. Only the $276.96 penalty was at issue.

Q: Why did out-of-state clients not prevent the tax?
A: The AHO focused on Metzloff engaging in business and performing editing services while residing in New Mexico.

Q: Was her CPA considered incompetent?
A: No. The AHO said a licensed CPA met the baseline competency requirement, but there was no evidence he had been retained or consulted about New Mexico gross receipts tax.

Q: Did the CPA's ignorance count as professional advice?
A: No. His statement that he was unaware of the tax showed that no informed advice had been given.

Q: Did lack of bad intent eliminate the penalty?
A: No. Civil negligence included inadvertence, erroneous belief, and inattention even without an intent to evade tax.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5 and 7-9-4 — gross receipts and engaging in business
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-69 — civil negligence penalty and good-faith mistake of law
• Regulations 3.1.6.13, 3.1.11.10, and 3.1.11.11(D) NMAC — presumption, negligence, and reasonable accountant reliance

Cases cited:

• Archuleta v. O'Cheskey, 1972-NMCA-165 — taxpayer's burden to overcome an assessment
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — no penalty relief without informed consultation
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's duty to ascertain tax consequences
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — appointing an accountant does not eliminate the taxpayer's duty

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Emily W. Metzloff
• Decision PDF: D&O 16-52

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
EMILY W. METZLOFF, No. 16-52
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L1087927856

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on November 1, 2016 before

Hearing Officer Chris Romero, Esq. The Taxation and Revenue Department (Department) was

represented by Ms. Melinda Wolinsky, Staff Attorney. Mr. Nicholas Pacheco, Auditor, also

appeared and testified on behalf of the Department. Ms. Emily W. Metzloff (Taxpayer), appeared

for the hearing. The Taxpayer testified and represented herself. The Department’s exhibits “C”

and “D” were admitted. A more detailed description of exhibits submitted at the hearing is

included on the Administrative Exhibit Coversheet. 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 July 29, 2016, the Department assessed the Taxpayer for gross receipts tax in

the amount of $1,384.84, penalty in the amount of $276.96, and interest in the amount of $123.17,

for the tax periods from January 1, 2012 through December 31, 2013.

2. By correspondence dated August 16, 2016, David J. Blesy, CPA (hereinafter “Mr.

Blesy”), requested on behalf of the Taxpayer that the Department waive the assessed penalty. The

Department received the correspondence on August 22, 2016 and construed the correspondence

as a formal protest. The correspondence was admitted as Dept. Ex. C.

3. Dept. Ex. C indicates that Mr. Blesy is a certified public accountant.
4. The Department acknowledged the Taxpayer’s receipt of a valid protest on August

29, 2016.

5. On October 11, 2016, the Department filed a Request for Hearing requesting that

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

6. On October 12, 2016, the Hearings Office issued a Notice of Administrative

Hearing setting a hearing on the merits for November 1, 2016, a date within 90 days of the receipt

of the protest.

7. Taxpayer did not protest the assessment of principal or interest. The only issue

protested was the assessment of the civil negligence penalty.

8. During the reporting periods at issue, the Taxpayer provided editing services for

out-of-state internet clients. Taxpayer edited text for publication on the internet.

9. Taxpayer’s clients compensated her for her services and issued Forms 1099.

Taxpayer’s clients did not withhold taxes or pay unemployment insurance on her behalf.

10. Taxpayer’s income taxes were prepared by Mr. Blesy. He is a certified public

accountant in New York and referred to Taxpayer by her father. Mr. Blesy has prepared Taxpayer’s

income taxes for many years.

11. Taxpayer resided in New Mexico during the reporting periods at issue.

12. The retainer agreement between Taxpayer and Mr. Blesy, admitted as Dept. Ex. D,

indicated that Mr. Blesy has been under retainer to provide services to Taxpayer since December

22, 2009.

13. In response to the assessment issued by the Department, Mr. Blesy indicated in his

correspondence, dated August 16, 2016, that “[b]ecause we were not aware of this tax, and

Emily W. Metzloff
Letter ID No. L1087927856
Page 2 of 8
therefore could not properly advise our client with regard to filing of form CRS-1, we respectfully

request that the $276.96 penalty on the enclosed assessment be abated.” See Dept. Ex. C.

14. Taxpayer’s interactions with Mr. Blesy were limited to exchanging documents, and

recalled talking with him on the telephone on only one occasion.

15. Taxpayer and Mr. Blesy never discussed the issue of New Mexico gross receipts

taxes.

16. Taxpayer has never consulted with a tax professional based in New Mexico.

17. Taxpayer did not know that gross receipts tax would apply to the compensation she

received for her editing services.

18. A Schedule C mismatch revealed that the Taxpayer reported income on Schedule

C that was not reported for the purpose of the gross receipts tax during the reporting periods at

issue.

DISCUSSION

Anyone engaging in business in New Mexico is subject to the gross receipts tax. See

NMSA 1978, Section 7-9-4. Gross receipts tax applies to the total amount of money received from

selling property or services. See NMSA 1978, Section 7-9-3.5. It was undisputed that the

Taxpayer was providing services in New Mexico as an editor for online entities. Therefore, the

Taxpayer was subject to the gross receipts tax. Taxpayer has paid the assessed tax and interest.

The only issue in this protest is whether the civil negligence penalty assessed pursuant to NMSA

1978, Section 7-1-69 and Regulation 3.1.11.11 (A) NMAC may be abated.

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

Emily W. Metzloff
Letter ID No. L1087927856
Page 3 of 8
purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, Section7-1-3 (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

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). Therefore, the assessment of a civil negligence penalty is presumed to be

correct, and it is the Taxpayer’s burden to present evidence and legal argument to show that she is

entitled to an abatement of the 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).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24, 32 (use of the

word “shall” in a statute indicates that a 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
Emily W. Metzloff
Letter ID No. L1087927856
Page 4 of 8
case, Taxpayer was negligent under all three definitions. Taxpayer failed to exercise a degree of

ordinary business care and prudence which a reasonable taxpayer would exercise under like

circumstances with regard for understanding her gross receipts tax obligations. As a result, Taxpayer

failed to take action to report and pay gross receipts, a failure which was caused in part by carelessness

or inattention.

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

subject to penalty, Section 7-1-69 (B) provides a limited exception in that “[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 her when she failed to report and pay gross receipts tax. 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. That regulation establishes eight indicators of non-negligence where penalty

may be abated. Based on the argument of Taxpayer and the evidence presented, only one factor

under Regulation 3.1.11.11 NMAC is potentially applicable in this proceeding:

D. the taxpayer proves that the failure to pay tax or to file a return 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; failure to make a timely filing of a tax return, however, is not excused
by the taxpayer's reliance on an agent;

Emily W. Metzloff
Letter ID No. L1087927856
Page 5 of 8
Taxpayer retained Mr. Blesy, a certified public accountant, to assist with her tax filings.

According to Dept. Ex. D, Mr. Blesy was under retainer since December 22, 2009. Employing a

licensed C.P.A. meets the baseline competency requirement necessary to find reasonable reliance

on that accountant’s advice.

The problem in this case is that the evidence did not establish that Taxpayer actually relied

on Mr. Blesy for purposes other than preparing her personal income tax returns. If her intention

was to rely on Mr. Blesy for additional purposes, such as understanding or fulfilling her tax

obligations under New Mexico’s Gross Receipts and Compensating Tax Act, then that reliance

was patently unreasonable.

Knowing that Mr. Blesy was based in New York, Taxpayer did not inquire into whether

Mr. Blesy had any knowledge or experience with New Mexico’s gross receipts tax. The Taxpayer

explained that her interactions with Mr. Blesy were limited to exchanging documents, and recalled

talking with him on the telephone on only one occasion. If the Taxpayer had made additional

inquiry, Taxpayer and Mr. Blesy could have been alerted to the issue and could have acted

accordingly. Instead, Mr. Blesy admitted that he did not know about the New Mexico gross receipts

tax and was unable to properly advise the Taxpayer regarding her gross receipts tax

responsibilities.

It is the Taxpayer’s duty under Tiffany Construction Co., 1976-NMCA-127, ¶5, to ascertain

the tax consequences of her actions. A taxpayer cannot “abdicate this responsibility [to learn of tax

obligations] merely by appointing an accountant as its agent in tax matters.” El Centro Villa Nursing

Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶14, 108 N.M. 795. Although the

task may seem formidable, the Department provides a variety of publications available at no cost

intended to provide general guidance on various topics, including gross receipts taxes. See FYI-105

Emily W. Metzloff
Letter ID No. L1087927856
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Gross Receipts & Compensating Taxes: An Overview at www.tax.newmexico.gov/forms-

publications.aspx.

The Department did not allege that the Taxpayer’s inaction was with the intent to evade or

defeat a tax. In contrast, there was no dispute that the issue giving rise to this protest was the result

of Taxpayer’s inadvertence, erroneous belief, or inattention. In other words, Taxpayer did not act

with bad intentions. Yet, El Centro Villa Nursing established that the civil negligence penalty is

appropriate for inadvertent error and Regulation 3.1.11.11 (D) NMAC does not provide grounds

for abatement of the penalty.

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

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Assessment issued under Letter ID

number L1087927856, and jurisdiction lies over the parties and the subject matter of this protest.

B. The hearing occurred within 90 days of the Department’s receipt of the protest

satisfying the 90-day hearing requirement of NMSA 1978, Sec 7-1B-8.

C. The Taxpayer was engaged in business as an independent contractor and was

providing services. The Taxpayer was subject to the gross receipts tax. See NMSA 1978, Section 7-

9-3.5 and Section 7-9-4.

D. The Taxpayer failed to prove that she was not negligent; therefore, penalty was

properly assessed. See NMSA 1978, Section 7-1-69.

E. The Taxpayer failed to overcome the presumption of correctness. See NMSA 1978,

Section 7-1-17.

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

Emily W. Metzloff
Letter ID No. L1087927856
Page 7 of 8
DATED: November 14, 2016

Chris Romero
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

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

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

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

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

Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

Emily W. Metzloff
Letter ID No. L1087927856
Page 8 of 8