Were a handyman and personal assistant's client reimbursements excluded from New Mexico gross receipts tax as amounts received in a disclosed agency capacity?

Plain-English summary

State Construction's client reimbursements were taxable because it did not prove that it acted in a disclosed agency capacity. Separately listing the expenses on invoices satisfied the bookkeeping requirement, but it did not establish the legally required relationship among State Construction, its clients, and the vendors.

Paul Rieger operated State Construction and worked as a handyman and personal assistant. He performed errands, home repairs, maintenance, and purchases for clients, primarily S.B. His monthly invoices separately showed his hourly service charges and the actual out-of-pocket costs he wanted reimbursed. He charged gross receipts tax on the services but not on the reimbursements.

State Construction excluded those reimbursements from its CRS reports because Rieger considered himself a disclosed agent. But it included the reimbursements on federal Schedule C, creating the mismatch that led to the assessment.

Separately stated expenses were not enough

Section 7-9-3.5(A)(3)(f) excluded amounts received solely for another in a disclosed agency capacity. Regulation 3.2.1.19(C) required more than separate invoice and bookkeeping entries: the taxpayer had to incur the expense as an agent with power to bind the principal, and the third party had to be able to enforce the obligation against the principal.

The AHO found that State Construction's invoices clearly separated the reimbursed expenses and therefore met the bookkeeping component. The proof failed on the agency component:

• S.B.'s unsworn statement called Rieger an agent and assistant but did not show that he could bind her to contracts.
• It also did not show that vendors had a right to enforce Rieger's obligations against her.
• Vendor statements were unsworn, drafted by Rieger, and did not specify how, when, or to whom an agency relationship was disclosed.
• Some statements were signed by people Rieger could not identify or had never met, leaving the AHO unable to find them reliable.

The AHO therefore treated the reimbursements as gross receipts received in connection with State Construction's services.

The record did not prove constructive disclosure

Rieger argued that some transactions inherently showed he was acting for someone else—for example, servicing a vehicle he did not own, retrieving another person's medications, or buying veterinary goods for an animal whose records identified a different owner.

The AHO declined to infer disclosure. State Construction presented no evidence showing what a particular vendor actually knew during a particular transaction or what significance the vendor gave that information.

No prescription-drug deduction was proved

State Construction also argued that reimbursements for medications should not be taxed because the underlying purchases were not taxable.

Without deciding whether State Construction had standing to claim Section 7-9-73.2, the AHO rejected the claim because no evidence established that any reimbursed medication met the statute's definition of a prescription drug.

Penalty and interest remained

The AHO found the underreporting unintentional but negligent. Rieger prepared the relevant state and federal returns himself, did not obtain formal tax advice, and omitted the reimbursements based on an erroneous belief that tax was not due.

That inaction and erroneous belief met the regulatory definition of civil negligence. The good-faith mistake-of-law exception did not apply because there was no informed consultation or study supporting the reporting position. Interest was mandatory until the tax principal was paid.

Result: protest DENIED. As of the hearing, State Construction owed $6,455.32 gross receipts tax, $1,291.08 penalty, $868.32 interest, and $142.90 additional accrued interest, for a total of $8,757.72.

What this means for you

Service businesses advancing client costs

Separately stated reimbursements do not by themselves remove the receipts from New Mexico gross receipts tax. The disclosed-agency exclusion also requires evidence that the service provider can bind the client and that the vendor can enforce the resulting obligation against the client.

Businesses relying on vendor awareness

Keep transaction-specific evidence of what was disclosed, to whom, and when. General statements prepared after the fact—especially unsworn statements without personal-knowledge details—may not establish disclosed agency.

Businesses claiming a deduction for reimbursed items

Document that each item satisfies the particular statutory deduction. The tax treatment of the underlying purchase was not enough here without evidence that the reimbursed medications met the prescription-drug definition.

Common questions

Q: Did separately stating each reimbursed cost satisfy the bookkeeping rule?
A: Yes. The invoices clearly separated the charges, but State Construction still had to prove disclosed agency.

Q: What agency proof was missing?
A: Proof that State Construction could bind its clients to vendor contracts and that vendors could enforce those obligations against the clients.

Q: Why were the client and vendor statements insufficient?
A: They were unsworn and lacked transaction-specific details. Rieger drafted the vendor statements, and he did not know some signers.

Q: Did vehicle ownership, patient identity, or veterinary records constructively disclose agency?
A: Not on this record. There was no evidence of what a vendor actually knew or understood during any particular transaction.

Q: Were medication reimbursements deductible?
A: No deduction was proved because State Construction offered no evidence that the medications satisfied Section 7-9-73.2's definition.

Q: Why was the negligence penalty upheld?
A: State Construction failed to report the reimbursements based on its own erroneous belief and showed no informed consultation or other reasonable-ground basis for the mistake.

Q: What amount remained due?
A: $8,757.72 as of the hearing, including tax, penalty, stated interest, and additional accrued interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5(A), 7-9-4, and 7-9-5 — engaging in business, gross receipts, gross receipts tax, and the presumption that business receipts are taxable
• NMSA 1978, § 7-9-73.2 — prescription drugs and oxygen deduction
• NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and civil-negligence penalty
• Regulation 3.2.1.19(C) NMAC — reimbursements, separate bookkeeping, and disclosed agency
• Regulations 3.1.6.12 and 3.1.6.13 NMAC — assessment presumption
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and indicators of nonnegligence

Cases cited:

• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021 — disclosed-agency requirements and the assessment presumption
• Wing Pawn Shop v. Taxation & Revenue Department, 1991-NMCA-024 — deductions and exemptions are strictly construed
• New Mexico Taxation & Revenue Department v. Casias Trucking, 2014-NMCA-099 — taxpayer's burden to counter an assessment
• C & D Trailer Sales v. Taxation & Revenue Department, 1979-NMCA-151 — penalty where no informed consultation supported nonpayment
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 1989-NMCA-070 — erroneous belief and negligence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: State Construction
• Decision PDF: D&O 17-38

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
STATE CONSTRUCTION No. 17-38
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0962300208

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on July 26, 2017 before Chris

Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. At the hearing, Mr. Paul Rieger

appeared pro se for State Construction (“Taxpayer”). Staff Attorney, Mr. Marek Grabowski,

appeared representing the State of New Mexico Taxation and Revenue Department

(“Department”). Protest Auditor Amanda Carlisle appeared as a witness for the Department.

Taxpayer Exhibits #1 – #13 and Department Exhibit A were admitted into the record. Based on

the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On January 5, 2017, under Letter ID No. L0962300208, the Department assessed

Taxpayer for $6,455.32 in gross receipts tax, $1,291.08 in penalty, and $868.32 in interest for the

CRS reporting periods between January 1, 2010 and December 31, 2014.

2. On February 3, 2017, Taxpayer prepared a letter of protest of the Department’s

assessment. The Department received Taxpayer’s protest on February 10, 2017.

3. On February 21, 2017, the Department’s protest office acknowledged receipt of a

valid protest.

4. On April 4, 2017, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

5. On April 5, 2017, the Administrative Hearings Office sent Notice of Telephonic

Scheduling Conference, scheduling this matter for a scheduling conference on April 21, 2017.

6. A telephonic scheduling conference occurred on April 21, 2017 at which time the

parties did not object that the scheduling hearing satisfied the 90-day hearing requirement under

NMSA 1978, Sec. 7-1B-8 (B) (2015).

7. On April 24, 2017, the Administrative Hearings Office filed and mailed a

Scheduling Order and Notice of Administrative Hearing which in addition to establishing various

deadlines, set a hearing on the merits of the Taxpayer’s protest for July 26, 2017.

8. The issues in dispute arose from Taxpayer’s work as a handyman and personal

assistant. Over the period subject of the protest, the overwhelming majority of receipts at issue

arose from the work Taxpayer preformed for one client, Ms. Sallie Bingham (hereinafter “S.B.”).

[Testimony of Mr. Rieger; Taxpayer Ex. 1.1].

9. For approximately 15 years, Taxpayer has provided various services for S.B.,

ranging from errands to home repairs and maintenance. [Testimony of Mr. Rieger].

10. Although services performed for S.B. represented the majority of receipts subject

of the protest, Taxpayer performed similar services for other clients including, Mr. Alex Traube

(hereinafter “A.T.”). [Testimony of Mr. Rieger].

11. At the conclusion of every month in protest, Taxpayer prepared an invoice

containing a description of the services performed, an hourly charge for those services, and a list

of all costs or expenses for which he sought reimbursement. [Testimony of Mr. Rieger; Taxpayer

Exs. 2; 3; 4; 5; 6; 7; 8; 9; 10; 11; 12; 13.].

12. Invoices included gross receipts tax on services provided and separately stated the

actual out-of-pocket expenditures incurred in providing those services. Taxpayer did not charge

In the Matter of the Protest of State Construction
Page 2 of 16
any additional gross receipts tax on expenditures for which he sought reimbursement.

[Testimony of Mr. Rieger; Taxpayer Exs. 2; 3; 4; 5; 6; 7; 8; 9; 10; 11; 12; 13.].

13. In preparing his CRS returns and making payments, Taxpayer reported gross

receipts and paid gross receipts tax only on the services for which he was compensated.

Taxpayer excluded reimbursed expenses from his gross receipts reports because he considered

himself to be the disclosed agent of his clients, including S.B. [Testimony of Mr. Rieger;

Taxpayer Ex. 1].

14. For federal tax reporting and filing purposes, receipts which represented

reimbursements for expenditures were included on Taxpayer’s Schedule C, which resulted in a

mismatch between Taxpayer’s Schedule C and his reported gross receipts. [Testimony of Mr.

Rieger; Testimony of Ms. Carlisle].

15. The nature of the services Taxpayer provided varied widely from minor home

maintenance and repairs to personal errands such as purchasing pet food, picking up

prescriptions, dropping off and picking up automobiles for service or repairs, picking up and

dropping off apparels for cleaning, purchasing home goods, supplies, or grocery products,

purchasing office supplies, or picking up and dropping off jewelry for repairs.

16. In some circumstances, it should have been obvious to certain venders that

Taxpayer may be acting on behalf of a third party. Vendors providing services for S.B.’s

automobiles, for example, had actual or constructive knowledge that Taxpayer was not the

registered owner of the vehicles. [Testimony of Ms. Rieger].

17. Other transactions were less obvious, such as purchases of small items such as

lightbulbs or batteries. [Testimony of Mr. Rieger].

In the Matter of the Protest of State Construction
Page 3 of 16

18. Taxpayer presented six unsworn statements signed by various venders, each of

which purport to establish knowledge that Taxpayer purchased good or services in a disclosed

agency capacity for his client. [Taxpayer Exs. 1.2 – 1.8].

19. Taxpayer prepared the statements and presented them to various vendors with

whom he frequently purchased goods or services. [Testimony of Mr. Rieger].

20. The statements do not necessarily correspond with any actual expenditures for

which reimbursement was sought as contained in Taxpayer Exhibits 2 – 13 and are silent as to

the periods of time to which they apply. [Testimony of Ms. Carlisle].

21. The Taxpayer limited the introduction of invoices to 2014 upon his understanding

that it would not be necessary for him to present invoices for other years in dispute because of

his perception that the central issue was whether or not Taxpayer acted in a disclosed agency

capacity. [Testimony of Mr. Rieger].

22. Taxpayer prepared his federal and state tax returns for all relevant periods of time

and did not rely on the advice of any tax professional. [Testimony of Mr. Rieger]

23. As of the date of the hearing, the Taxpayer’s liability was $6,455.32 in gross

receipts tax, $1,291.08, in penalty, $868.32 in interest, with an additional amount of accrued

interest of $142.90 for a total of $8,757.72. [Testimony of Ms. Carlisle; Department Ex. A].

DISCUSSION

This case involves the question of whether certain reimbursed expenses are subject to

gross receipts tax. The expenses subject of this protest arose from the services that Taxpayer

provided as a handyman and personal assistant. He incurred expenses on behalf of his customers

for which obtained reimbursement. Taxpayer included those reimbursements as income in his

In the Matter of the Protest of State Construction
Page 4 of 16
federal Schedule C resulting in a mismatch with his CRS reports for the years subject of the

protest.

Taxpayer claimed that gross receipts tax should not be due on reimbursed expenditures

because he incurred the expenses as an agent on behalf of a principal while acting in a disclosed

agency capacity.

Presumption of Correctness.

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

correctness under Sec. 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). Accordingly, it is Taxpayer’s burden to present some countervailing

evidence or legal argument to show that he is entitled to an abatement, in full or in part, of the

assessments issued against him. See N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-

NMCA-099, ¶8. “Unsubstantiated statements that the assessment is incorrect cannot overcome

the presumption of correctness." See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA

21, ¶13, 133 N.M. 217; See also Regulation 3.1.6.12 NMAC. When a taxpayer presents sufficient

evidence to rebut the presumption, the burden shifts to the Department to show that the

assessment is correct. See MPC Ltd., 2003 NMCA 21, ¶13.

In the Matter of the Protest of State Construction
Page 5 of 16
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.

Gross Receipts Tax, Reimbursed Expenditures, and Performance of a Service in New Mexico.

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, Sec. 7-9-4 (2002). Under NMSA

1978, Sec. 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean

the total amount of money or the value of other consideration received from selling
property in New Mexico, from leasing or licensing property employed in New
Mexico, from granting a right to use a franchise employed in New Mexico, from
selling services performed outside New Mexico, the product of which is initially
used in New Mexico, or from performing services in New Mexico.

“Engaging in business” is defined as “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” NMSA 1978, Sec. 7-9-3.3 (2003). Gross receipts tax

applies to the performance of a service in New Mexico. See NMSA 1978, Sec. 7-9-3.5 (2007).

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, Sec. 7-9-5 (2002).

In this case, there is little doubt that Taxpayer was engaged in the business of providing

services in New Mexico. Therefore, there is a presumption that all of Taxpayer’s receipts from

performing services in New Mexico were subject to gross receipts tax, including receipts from

reimbursements for expenditures made while performing services, unless Taxpayer can establish an

applicable deduction or exemption.

In the Matter of the Protest of State Construction
Page 6 of 16
Taxpayer asserted that the reimbursements that he received from his clients, particularly,

S.B., were reimbursed expenditures not subject to gross receipts tax, and were exempt from

taxation. The Department asserted that such receipts were subject to tax because there is insufficient

evidence to find that Taxpayer was a disclosed agent of his clients when making the expenditures.

Under NMSA 1978, Sec. 7-9-3.5 (A) (3) (f), excluded from gross receipts are “amounts

received solely on behalf of another in a disclosed agency capacity.” Under Regulation 3.2.1.19

(C) (1) NMAC,

The receipts of any person received as a reimbursement of expenditures
incurred in connection with the performance of a service or the sale or
lease of property are gross receipts as defined by Section 7-9-3.5 NMSA
1978, unless that person incurs such expense as agent on behalf of a
principal while acting in a disclosed agency capacity. An agency
relationship exists if a person has the power to bind a principal in a
contract with a third party so that the third party can enforce the
contractual obligation against the principal.

Regulation 3.2.1.19 (C) (2) NMAC further requires that the reimbursed expenditure be

separately stated on the bill and listed separately on the taxpayer’s books. In applying the

reimbursed expenditures to the gross receipts tax, the Court of Appeals in MPC Ltd. v. N.M.

Taxation & Revenue Dep't, 2003 NMCA 21, ¶36, 133 N.M. 217, construed Regulation 3.2.1.19

(C) (1) NMAC to mean that:

(1) the agent [taxpayer] has the authority to bind the principal… to an
obligation… created by the agent [taxpayer], and (2) the beneficiary of
that obligation… is informed by contract that he or she has a right to
proceed against the principal… to enforce the obligation.

Additionally, the New Mexico Court of Appeals in MPC LTD noted that Regulation 3.2.1.19 (C)

NMAC imposed additional bookkeeping requirements that must be met in order to exclude

receipts received as part of a disclosed agency capacity from gross receipts. See id.

In the Matter of the Protest of State Construction
Page 7 of 16
In this case, the invoices that Taxpayer submitted met the bookkeeping requirements of

Regulation 3.2.1.19 (C) NMAC, because they clearly separately stated the charges incurred

while providing services.

However, Taxpayer’s evidence failed to establish the existence of a disclosed agency

relationship in which the Taxpayer had the power to bind the principal in a contract with a third

party so that the third party could enforce the contractual obligation against the principal.

Reviewing the evidence upon which the Taxpayer relied, he presented a brief unsworn

statement from S.B., which stated that Taxpayer was “an agent and assistant” having the duty to

purchase goods and services at her request. [Taxpayer Ex. 1.1]. The statement was submitted to

establish a disclosed agency relationship between Taxpayer and S.B., but was inadequate for that

purpose. There is no suggestion that Taxpayer had the actual authority to bind S.B. to an

obligation that Taxpayer created, consistent with the first prong in MPC Ltd.

S.B.’s statement also fails to establish, at least from her perspective, that the beneficiaries

of any contractual obligations incurred by the Taxpayer had the actual right to proceed against

her in order to enforce the contractual obligations incurred by Taxpayer consistent with the

second prong in MPC Ltd..

Taxpayer also provided statements from seven venders with whom Taxpayer purportedly

did business during the years subject of the protest. [Taxpayer Exs. 1.2 – 1.8]. However, the

Hearing Officer did not find the statements reliable. All statements were unsworn and lacked

particulars to establish that the assertions made therein were based on the personal knowledge of

the individuals signing them. The statements were also unsatisfactory to establish how the

purported agency was disclosed, to whom it was disclosed, or when it was disclosed.

In the Matter of the Protest of State Construction
Page 8 of 16
With respect for their overall reliability, Taxpayer readily admitted that he authored the

statements, distributed them for signature, and retrieved them once they had been signed. In

some instances, the Taxpayer did not know the person who actually signed a statement and it

was similarly uncertain whether the person signing the statements actually knew the Taxpayer.

For example, Taxpayer Ex. 1.8, a statement purporting to be from S.B.’s pharmacist, was

signed by an individual who identified himself as the “Pharmacist in charge” and purported to

“confirm” that he “sold goods and services to [Taxpayer], working as an agent for his client,

[S.B.] and that his agency relationship was disclosed to [the pharmacist.]” However, Taxpayer

readily admitted that he never met the individual who signed the statement, and further admitted

that the only representative of the vendor with whom he ever interacted was the cashier at

checkout. Therefore, genuine doubt arose with respect for whether the pharmacist who signed

the statement actually knew Taxpayer or S.B., or had legitimate and actual knowledge at time of

various transactions that Taxpayer was acting on behalf of S.B. in his alleged capacity as a

disclosed agent with the authority to bind S.B. in contract.

The Hearing Officer made similar observations with regard for other statements which

were substantially the same as that discussed above. Taxpayer Ex. 1.2 was signed by an

individual identifying him or herself as an “estimator” for Custom Craft Auto Collision Inc., but

the person’s name was otherwise illegible. Given the opportunity, Taxpayer was unable to

identify the individual who signed the statement. Taxpayer Ex. 1.7 was signed on behalf of

Smith Veterinary Hospital by a person named Cynthia having the title of CSR. The signer’s last

name was also illegible. Given the opportunity to further elaborate regarding the identity of the

individual signing the statement, Taxpayer was unable to do so.

In the Matter of the Protest of State Construction
Page 9 of 16
It was evident that the Taxpayer did not know some of the signers and doubt arose as to

whether the signers actually knew the Taxpayer.

Even with respect to the statements from those more familiar to the Taxpayer, the

statements remain unreliable. None of the statements specifically address the periods at issue in

this matter, and as stated above, they are unsworn and fail to specify when any agency was

disclosed, by whom it was disclosed, how it was disclosed, or what was disclosed.

Although the facts in this protest may illustrate an example of disfavored tax pyramiding,

the fact that both Taxpayer and a vendor might pay a gross receipts tax on the goods is not

necessarily double taxation and not prohibited. New Mexico imposes a gross receipts tax on all

the receipts of a person or entity engaged in business. In this instance, Taxpayer is a distinct and

separate business from the vendors with whom he acquired goods while providing services, each

with their own obligations to pay the gross receipts tax. The reimbursement of expenses as part

of the performance of a service are gross receipts under Regulation 3.2.1.19(C) (1) NMAC

absent a showing of a disclosed agency relationship. The disclosed agency language of the

statute sets a high bar for a formalized, disclosed agency relationship before a business’ receipts

are not considered gross receipts tax. Under the controlling authority of Sec. 7-9-3.5(A) (3) (f),

3.2.1.19(C) (1) NMAC, and MPC Ltd., Taxpayer did not establish that his receipts attributable to

expenses incurred in providing services were incurred as a disclosed agent.

The Hearing Officer also considered whether the nature of some particular expenditures

could give rise to a constructive disclosure that Taxpayer was acting as a disclosed agent on

behalf of a principal, as Taxpayer suggested. The Taxpayer claimed that in such transactions, it

would be, or should be obvious, that he was acting in a disclosed agency capacity. Such

transaction, according to the Taxpayer, would include repairs to automobiles where it was

In the Matter of the Protest of State Construction
Page 10 of 16
apparent that he was not the registered owner of the automobile, or purchases of medications

where it was obvious that he was not the patient for whom the medications were prescribed, or

veterinary services or goods where it was evident from the records of the veterinarian that the

Taxpayer was not the owner of the animal for whom the products or services were purchased.

Despite Taxpayer’s position, the problem is that he presented no evidence to establish what

information any vendor actually had at the time of any given transaction or what, if any

significance, such information actually had on a vendor. In the absence of such evidence, the

Hearing Officer is prohibited from speculating as to what information any vendor may have had

at the time of any given transaction, or assess the significance that the information had, or should

have had, on the vendor.

Deduction for prescription drugs.

Taxpayer said that he provided a variety of services to S.B. during the years in protest,

one of which was retrieving medications from a pharmacy. Taxpayer argued that reimbursed

expenses, originally incurred for prescription medications, should not be taxed because the

underlying expenditure was not taxable. The Hearing Officer presumed that the Taxpayer was

referring to NMSA 1978, Sec. 7-9-73.2 (2007) which provides a deduction from gross receipts

tax and governmental gross receipts tax for prescription drugs:

7-9-73.2. Deduction; gross receipts tax and governmental gross
receipts tax; prescription drugs; oxygen.

A. Receipts from the sale of prescription drugs and oxygen and
oxygen services provided by a licensed medicare durable medical
equipment provider may be deducted from gross receipts and
governmental gross receipts.

B. For the purposes of this section, “prescription drugs” means
insulin and substances that are:

In the Matter of the Protest of State Construction
Page 11 of 16
(1) dispensed by or under the supervision of a licensed pharmacist
or by a physician or other person authorized under state law to do
so;

(2) prescribed for a specified person by a person authorized under
state law to prescribe the substance; and

(3) subject to the restrictions on sale contained in Subparagraph 1
of Subsection (b) of 21 USCA 353.

Without expressing any opinion as to whether Taxpayer has standing to claim a

deduction under this section, Taxpayer’s claim fails because he did not attempt to introduce any

evidence to establish that any medications, for which he was reimbursed, were “prescription

drugs” as defined by the deduction.

Penalty and Interest.

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, Sec. 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, 32 (use of the word “shall” in a statute indicates a provision is mandatory absent clear

indication to the contrary). The language of Sec. 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 Sec. 7-1-67 and must assess interest against Taxpayer until Taxpayer satisfies the

gross receipts tax principal.

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 Sec. 7-1-69

In the Matter of the Protest of State Construction
Page 12 of 16
(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 meets the legal definition of “negligence.” See Marbob

Energy Corp., ¶22.

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.”

Although certainly Taxpayer’s underreporting and underpaying of the CRS taxes was not

intentional in this case, Taxpayer was nevertheless civilly negligent under Regulation 3.1.11.10 (B)

& (C) NMAC because Taxpayer failed to take action to report and pay the appropriate amount of

CRS taxes when required through an erroneous belief that tax was not due on his reimbursed

expenditures. This inaction and erroneous belief constitutes negligence subject to penalty under Sec.

7-1-69. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-

070, ¶9-11, 108 N.M. 795.

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

generally subject to penalty, Sec. 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

engaged in any formal consultation or study of the issue before reporting or paying CRS taxes.

In the Matter of the Protest of State Construction
Page 13 of 16
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 Sec. 7-1-

69 (B) does not mandate abatement of penalty in this case. Additionally, there was no evidence

that might arguably support abatement of penalty under Regulation 3.1.11.11 NMAC.

Consequently, Taxpayer is liable for both penalty and interest.

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. A hearing was timely set within 90-days of protest under NMSA 1978, Sec. 7-1B-8

(2015).

C. Taxpayer was a person engaged in business for the purposes of NMSA 1978, Sec.

7-9-3.3 (2003), and as such all of Taxpayer’s receipts were presumed subject to gross receipts tax

under NMSA 1978, Sec. 7-9-5 (2002).

D. Taxpayer did not establish he was a disclosed agent and thus did not meet the

requirements under NMSA 1978, Sec. 7-9-3.5 (A) (3) (f) or Regulation 3.2.1.19 (C) NMAC to

exclude the amounts of reimbursed expenditures from taxable gross receipts and gross receipts

tax. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA 21, ¶36, 133 N.M. 217.

E. Taxpayer did not overcome the presumption of correctness, including the assessed

penalty, that attached to the assessments under NMSA 1978, Sec. 7-1-17 (C) (2007) and Archuleta

v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

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

penalty because Taxpayer’s inaction in failing to include gross receipts tax on his CRS returns

In the Matter of the Protest of State Construction
Page 14 of 16
during the relevant period met the definition of civil negligence under Regulation 3.1.11.10

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

would allow for abatement of penalty under Sec. 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 Taxpayer’s protest IS DENIED. Taxpayer’s outstanding

liability as of the date of the hearing was $6,455.32 in gross receipts tax, $1,291.08, in penalty,

$868.32 in interest, with an additional amount of accrued interest of $142.90 for a total of

$8,757.72.

DATED: September 13th, 2017

Chris Romero
Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of State Construction
Page 15 of 16
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. If an appeal is not filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

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 begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record with the Court of Appeals, which

occurs within 14 days of the Administrative Hearings Office’s receipt of the docketing statement

from the appealing party. See Rule 12-209 NMRA.

CERTIFICATE OF SERVICE

In the Matter of the Protest of State Construction
Page 16 of 16