Could Good Karma reduce a gross receipts tax assessment by documenting out-of-state services and periods beyond the limitations period?

Plain-English summary

Good Karma Art & Design reduced its gross receipts tax assessment by documenting services performed outside New Mexico and by obtaining the Department's concession that some periods were beyond the statute of limitations. Penalty and interest remained on the smaller balance because forgetting to file was negligence.

The Department initially assessed Good Karma for January 2011 through December 2013:

• $2,318.64 of gross receipts tax;
• $463.72 of penalty; and
• $264.91 of interest.

Good Karma conceded that it owed tax, penalty, and interest but disputed the amount. It argued that some work reported on Forms 1099 was performed outside New Mexico and that part of the assessment was too old.

Later documents established out-of-state work

At the September 22, 2016 hearing, owner Mary Luttrell said the business was still trying to obtain supporting documents. The Department agreed to give Good Karma one additional month.

Good Karma timely supplied records showing that work for two companies issuing Forms 1099 had been performed outside New Mexico. The Department removed those receipts from the assessment.

The Department also conceded that part of the assessment was beyond the statute of limitations and abated those amounts.

The decision does not identify the two companies, the precise out-of-state work, or which reporting periods were removed.

The remaining New Mexico service receipts were taxable

Sections 7-9-3.5 and 7-9-4 imposed gross receipts tax on money received from providing services while engaging in business in New Mexico.

Good Karma did not dispute that it provided taxable services in New Mexico. After the documented adjustments, it conceded the remaining tax.

Forgetting to file still supported penalty

Good Karma apologized and explained that it simply forgot to file. It did not intend to evade tax and described the failure as a mistake.

Section 7-1-69 made penalty mandatory when tax was not paid on time because of negligence. Regulation 3.1.11.10(C) included inadvertence within negligence, so an honest mistake did not require penalty abatement.

Interest under Section 7-1-67 was also mandatory because the remaining tax was not paid when due. The AHO described interest as compensation for the time value of unpaid revenue, not punishment.

After the abatements, the remaining assessment was:

• $536.88 of tax;
• $110.05 of penalty; and
• $61.62 of interest as of October 17, 2016.

Interest continued to accrue until the tax principal was paid.

Result: protest GRANTED IN PART AND DENIED IN PART. The out-of-state service receipts and time-barred periods were removed, while the reduced tax, penalty, and interest remained due.

What this means for you

Service businesses working across state lines

Keep project, customer, travel, and performance-location records. Forms 1099 show payments but may not show where the underlying services were performed.

Taxpayers protesting estimated or broad assessments

Continue gathering documents after filing a protest. This decision allowed additional time after the hearing, and the records materially reduced the assessment.

Businesses that miss filing deadlines

An unintentional oversight can still be negligence under New Mexico's penalty rules. Prompt correction does not automatically eliminate penalty or mandatory interest.

Common questions

Q: Did Good Karma eliminate the entire assessment?
A: No. Documentation and the limitations concession reduced it, but $536.88 of tax plus penalty and interest remained.

Q: What proved that some services were outside New Mexico?
A: Good Karma submitted additional documents concerning work for two companies that issued Forms 1099. The decision does not describe those documents in detail.

Q: Which periods were beyond the statute of limitations?
A: The decision says the Department conceded and abated part of the assessment but does not identify the specific periods.

Q: Why was penalty upheld if the owner did not intend to evade tax?
A: The failure resulted from forgetting to file, and the governing regulation treated inadvertence as negligence.

Q: How much remained due?
A: $536.88 tax, $110.05 penalty, and $61.62 interest as of October 17, 2016, with further interest accruing on the tax principal.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5 and 7-9-4 — gross receipts and tax on engaging in business
• NMSA 1978, §§ 7-1-3 and 7-1-17 — definition of tax and presumption that an assessment is correct
• NMSA 1978, § 7-1-28 — abatement
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulations 3.1.11.8 and 3.1.11.10(C) NMAC — penalty presumption and inadvertence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — assessment presumption
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Good Karma Art & Design
• Decision PDF: D&O 16-53

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
GOOD KARMA ART & DESIGN, No. 16-53
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L1705141808

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 22, 2016 before

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

represented by Mr. Peter Breen, Staff Attorney. Mr. Tom Dillon, Auditor, also appeared on behalf

of the Department. Ms. Mary Luttrell, owner of Good Karma Art & Design (Taxpayer),

appeared for the hearing. Mr. Stan Pettingill also appeared with the Taxpayer and was present at

Ms. Luttrell’s request. The Taxpayer indicated that it was still trying to obtain documents to

prove that part of the work was done out of state. The Department agreed to allow the Taxpayer

additional time to obtain the documents. The Taxpayer was given a deadline of one month from

the hearing date. The Department was given one week after that to respond to any additional

documentation submitted by the Taxpayer. The Taxpayer submitted documents timely, and the

Department timely responded. 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 June 15, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax periods from January 1, 2011 through December 31, 2013. The

assessment was for $2,318.64 tax, $463.72 penalty, and $264.91 interest.

2. On June 28, 2016, the Taxpayer filed a formal protest letter.

3. On August 12, 2016, the Department filed a Request for Hearing asking that the

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

4. On August 16, 2016, the Hearings Office issued a notice of hearing.

5. On September 2, 2016, a telephonic scheduling hearing was held. The parties agreed that

the telephonic hearing satisfied the 90-day requirement of the statute.

6. On September 9, 2016, a scheduling order and notice was issued.

7. The Taxpayer was providing services during the tax periods.

8. The Taxpayer was issued 1099s for its work during the tax periods.

9. The Taxpayer conceded that it owed tax, penalty, and interest, but disputed the amount

owed. The Taxpayer argued that some of the assessment was beyond the statute of

limitations and that the Taxpayer provided some of its services outside of New Mexico.

10. The Taxpayer provided additional documentation to show that its services for two

companies that issued 1099s during the tax periods were for work that was done outside

of New Mexico.

11. The Department conceded that part of the assessment was beyond the statute of

limitations and conceded that the documents proved that the work for those two

companies was done outside of New Mexico. The Department abated the assessment

accordingly.

12. The Department advised that the amount of the assessment that remains outstanding is

$536.88 tax, $110.05 penalty, and as of October 17, 2016, $61.62 interest. Interest

continues to accrue until the tax principal is paid.

Good Karma Art & Design
Letter ID No. L1705141808
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DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the assessment.

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.

Gross receipts tax.

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

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

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

was providing services. Therefore, the Taxpayer was subject to the gross receipts tax. The

Taxpayer also conceded that it owed tax, but sought to have assessment limited to work done

within the state of New Mexico and to tax periods that were not beyond the statute of limitations.

When the additional documentation was provided, the Department removed the gross

receipts tax from the 1099s that were for work done outside of New Mexico. The Department

also conceded that part of the assessment was beyond the statute of limitations and abated

accordingly.

Assessment of Penalty.

Good Karma Art & Design
Letter ID No. L1705141808
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The Taxpayer apologized for its failure to pay its gross receipts taxes. The Taxpayer

explained that it simply forgot to file during that time. The Taxpayer explained that it was not

trying to evade its taxes; it just made a mistake and did not realize it.

Penalty “shall be added to the amount assessed” when a tax is not paid on time due to

negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added). The word “shall” indicates that

the assessment of penalty is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm’n., 2009-NMSC-013, ¶ 22, 146 N.M. 24. Assessments of penalty are

presumed to be correct and it is a taxpayer’s burden to show that the assessment was not correct.

See 3.1.11.8 NMAC (2001). See NMSA 1978, § 7-1-17. See also El Centro, 1989-NMCA-070.

It is a taxpayer’s responsibility to make payments, whether they are done electronically or in

another fashion. See NMSA 1978, § 7-1-13.1 (2005). Negligence includes inadvertence. See

3.1.11.10 (C) (2001). Under the statute and regulations, an honest mistake is tantamount to

inadvertence, and is subject to penalty. See id. Therefore, penalty was properly assessed.

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). Again, the word “shall” indicates that the assessment of interest

is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n.,

2009-NMSC-013, ¶ 22, 146 N.M. 24. The assessment of interest is not designed to punish

taxpayers, but to compensate the state for the time value of unpaid revenues. Because the tax

was not paid when it was due, interest was properly assessed.

CONCLUSIONS OF LAW

Good Karma Art & Design
Letter ID No. L1705141808
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A. The Taxpayer filed a timely written protest to the assessment issued under Letter ID

number L1705141808, and jurisdiction lies over the parties and the subject matter of this protest.

B. A hearing was held within 90 days of the protest. See NMSA 1978, § 7-1B-8 (A)

(2015).

C. The Taxpayer conceded that it owed gross receipts tax. See NMSA 1978, § 7-9-4.

D. The Department abated the taxes that were beyond the statute of limitations and

that were for services performed out of state. See id. See also NMSA 1978, § 7-1-28.

E. The Taxpayer was properly assessed for penalty and interest. See NMSA 1978, §

7-1-67 and § 7-1-69.

F. The assessment is still outstanding as to $536.88 tax, $110.05 penalty, and as of

October 17, 2016, $61.62 interest. Interest continues to accrue until the tax principal is paid.

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

IN PART.

DATED: November 18, 2016.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

Good Karma Art & Design
Letter ID No. L1705141808
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