Could Wagner Equipment avoid civil penalties when a key employee's sudden retirement caused seven months of withholding returns to go unfiled even though the taxes were paid on time?

Plain-English summary

Wagner Equipment remained liable for civil penalties after failing to file seven consecutive monthly withholding-tax returns, even though it paid the underlying taxes on time. The sudden retirement of a key payroll employee did not establish non-negligence because Wagner did not seek outside guidance or adequately verify its New Mexico reporting obligations.

The official tax decision and PDF identify the taxpayer as Wagner Equipment Co. The Department's post title says “Wager Equipment Co.,” which caused the initial stub to carry that typo.

In October 2017, Wagner's compensation supervisor—a 34-year employee—gave two weeks' retirement notice. The company had a three-person accounting office in Aurora, Colorado handling payroll reporting for Colorado, New Mexico, and Texas, including approximately 300 to 350 New Mexico employees in a typical month.

Wagner tried to manage the transition. It contracted with the retiring employee to work part-time from home, supplied remote-work equipment, held weekly meetings, and gradually trained and promoted a 17-year employee as her replacement. But the retiree did not produce written procedures or a task list, and her contract ended in April 2018.

The payments were timely, but the returns were not

Wagner paid the withholding taxes through the Department's Taxpayer Access Point, or TAP, system. It received payment-confirmation emails, but those emails did not say that separate returns were required or warn that a return had not been filed.

The company nevertheless failed to file CRS-1 returns for November 2017 through May 2018. It discovered the omission after another department noticed an unexplained TAP credit and filed all seven returns on June 27, 2018.

The Department issued seven penalty assessments. The decision states an initial aggregate of $47,047.19, while the later hearing request listed $46,977.19 as the amount in controversy. It did not explain the $70 difference.

The staff transition did not overcome negligence

Section 7-1-69 made the penalty mandatory when failure to file resulted from negligence or disregard of Department rules. Regulation 3.1.11.10 defined negligence to include failure to use ordinary business care, inaction when action is required, inadvertence, carelessness, erroneous belief, and inattention.

The AHO recognized that keeping the retired employee under contract was “a step in the right direction.” But Wagner did not show that it:

• contacted the Department about the reporting process;
• consulted a CPA;
• explored TAP to understand what had been filed and what remained due; or
• met any listed indicator of non-negligence under Regulation 3.1.11.11.

The good-faith mistake-of-law exception required reasonable grounds developed through inquiry. Wagner's reliance on its previous compliance and on the retiring employee did not satisfy that standard. A business could not transfer away its own tax responsibility merely by assigning the work to an employee or agent.

Result: protest DENIED. The civil negligence penalties remained assessed. Because of the two different aggregate figures in the procedural record, the decision does not establish one reconciled final dollar amount.

What this means for you

Employers changing payroll personnel

Use a written transition checklist that separately tracks tax payments and return filings in every state. A payment confirmation is not necessarily proof that the related return was filed.

Multistate payroll departments

Confirm each state's filing mechanics directly with the agency or a qualified adviser. Procedures that worked under one employee's undocumented process can fail when responsibilities change.

Businesses using online tax portals

Investigate unexplained credits, alerts, and account balances promptly. Reconcile the portal's filed-return history separately from its payment history.

Taxpayers seeking penalty abatement

Document timely inquiry and reliance: whom you contacted, what advice you received, and why it was reasonable. Internal staffing difficulty and good intentions alone may not establish non-negligence.

Common questions

Q: Were Wagner's withholding taxes paid late?
A: No. The tax payments were timely; the seven monthly returns were filed late.

Q: Which return periods were involved?
A: November 2017 through May 2018.

Q: When did Wagner file the missing returns?
A: It filed them together on June 27, 2018 after discovering an unexplained TAP credit.

Q: Why did the payment-confirmation emails not protect Wagner?
A: They confirmed payments but did not say returns had been filed. Wagner still had responsibility to verify both obligations.

Q: Did the AHO credit Wagner's transition efforts?
A: It acknowledged the contract with the retiring employee as a positive step, but found the efforts insufficient without agency or professional inquiry and stronger reporting controls.

Q: Was there evidence that Wagner called the Department or a CPA?
A: No. Its controller was unaware of any Department inquiry, and the company did not consult a CPA about New Mexico compliance.

Q: How much penalty remained?
A: The decision gives two figures: $47,047.19 in the seven assessment letters and $46,977.19 in the hearing request. It denied abatement but did not reconcile the difference.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-3-1 et seq. — Withholding Tax Act
• NMSA 1978, § 7-1-69(A) and (B) — civil negligence penalty and good-faith mistake-of-law exception
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(Y) — assessment presumption and tax definition
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and indicators of non-negligence
• Regulation 3.1.6.13 NMAC — assessment presumption for penalty and interest

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertence can be negligence, and a taxpayer cannot abdicate tax responsibility to an agent
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — “shall” imposes a mandatory duty
• GEA Integrated Cooling Technologies v. State Taxation & Revenue Department, 2012-NMCA-010 — civil penalties deter and punish
• Archuleta v. O'Cheskey, 1972-NMCA-165 — taxpayer's burden to overcome an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Wager Equipment Co (official post title)
• Decision PDF: D&O 18-36

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF D&O No. 18-36
WAGNER EQUIPMENT CO.
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0183582512, L1257324336, L0720453424,
L1794195248, L0452017968 L1525759792 and L0467091248

v. Case Number 18.10-258A

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

On November 8, 2018, Hearing Officer Ignacio V. Gallegos, Esq. conducted a merits hearing in

the mater of the tax protest of Wagner Equipment Co. pursuant to the Tax Administration Act and the

Administrative Hearings Office Act. At the hearing, Attorney Robert J. Muehlenweg appeared on behalf

of Wagner Equipment Co. (“Taxpayer”), accompanied by Candace Murray Waddell, Controller for

Taxpayer. Staff Attorney Regina Ryanczak, appeared, representing the opposing party in the protest, the

Taxation and Revenue Department (“Department”), along with Protest Auditor Veronica Galewaler.

Ms. Waddell and Ms. Galewaler testified at the hearing. Taxpayer’s Exhibits 1, 2, 3, and 4 were

admitted into the record without objection. The Department’s Exhibits A and B were admitted without

objection. The Hearing Officer took administrative notice of all documents contained in the administrative

file. All exhibits are more fully described in the Administrative Exhibit Log.

The main issue presented before this tribunal in this protest is whether Wagner Equipment Co. was

negligent in failing to file CRS-1 returns for seven consecutive months reporting withholding taxes, upon

the sudden retirement of a key employee. After making findings of fact in this matter and discussing the

arguments and the pertinent legal authority in more detail, this tribunal ultimately concludes/rules that the

Department prevails in this protest because the Taxpayer was unable to show the omission was non-

negligence.

In the Matter of the Protest of Wagner Equipment Co.
Page 1 of 9
FINDINGS OF FACT

1. On July 11, 2018, the Department issued seven Assessment letters to Taxpayer, assessing

penalty in the aggregate amount of $47,047.19 for the withholding tax reporting periods ending

November 30, 2017, December 31, 2017, January 31, 2018, February 28, 2018, March 31, 2018, April 30,

2018, and May 31, 2018, under the Withholding Tax Act, NMSA 1978, Section 7-3-1 et seq. [Letter ID #

L0183582512; L1257324336; L0720453424; L1794195248; L0452017968; L1525759792;

L0467091248].

2. On August 2, 2018, Taxpayer filed a protest of the Department’s assessment of penalty.

In the protest letter, Taxpayer provided a rationale to support of the requested abatement of penalty,

indicating that a change of staff caused the omission of filing timely returns. The protest letter was

stamped as received by the Department protest office on August 9, 2018. [Administrative file].

3. On August 27, 2018, the Department acknowledged receipt of the formal protest. [Letter

ID # L1458306864].

4. On October 17, 2018, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing, alleging the amount in controversy

of $46,977.19. [Administrative File].

5. On October 18, 2018, the Administrative Hearings Office issued the Notice of

Administrative Hearing scheduling this matter for November 8, 2018, within 90 days of the Department’s

receipt of the protest. [Administrative file].

6. On October 30, 2018, Attorney Robert J. Muehlenweg filed an entry of appearance on

behalf of Taxpayer. [Administrative file].

7. On November 8, 2018 a hearing was held at the Administrative Hearings Office, in the

Wendell Chino Building, Suite 269, in Santa Fe, New Mexico, a total of 73 days from when the protest

was acknowledged by the Department.

In the Matter of the Protest of Wagner Equipment Co.
Page 2 of 9

8. Ms. Waddell is Controller for Taxpayer. In her position, she is tasked with oversight of

the accounting department, which is responsible for payroll and payroll taxes. The office in Aurora,

Colorado has three employees. The compensation supervisor handles the payroll. There are typically

between 300 and 350 employees in New Mexico in any given month. The department handles reporting

in Colorado, New Mexico and Texas. [Testimony of Ms. Waddell].

9. In October of 2017, the compensation supervisor, a veteran employee of 34 years, gave

notice that she would be retiring in two weeks. The notice set in motion a hurried attempt to transition the

veteran employee’s job functions to other employees. The Taxpayer set about attempting to make task

lists, identifying the compensation supervisor’s duties, and training other employees on how to do those

tasks. [Testimony of Ms. Waddell].

10. In order to provide additional time for the retiring employee to engage in providing

procedures for the replacement employee, the Taxpayer negotiated a contract with the retiring employee

to work part-time from home. Under the contract, the Taxpayer provided the retired employee with a

laptop computer, an internet connection, and a cell phone so that they would be able to communicate with

her in the transitional months. [Testimony of Ms. Waddell].

11. Another employee, a veteran employee of 17 years, was vetted and eventually promoted

to the position vacant due to the retirement. Before becoming the official replacement compensation

supervisor in February of 2018, the replacement compensation supervisor was being cross-trained and

took over responsibilities gradually. The retired employee, on contract, was difficult to glean information

from, and was not able to provide written procedures or a task list, despite weekly meetings and regular

phone contact. The contract expired in April of 2018. [Testimony of Ms. Waddell].

12. The payroll taxes were paid, but no returns were filed in the timeframes at issue here.

Ms. Waddell did not recall ever seeing a paper printout of a return in the documents left behind by the

retired employee. [Testimony of Ms. Waddell].

In the Matter of the Protest of Wagner Equipment Co.
Page 3 of 9

13. Ms. Waddell was unaware if anyone called the Department to inquire if they were

completing their reporting properly. Taxpayer did not consult with a Certified Public Accountant (CPA)

to determine whether it complied with New Mexico tax regulations. [Testimony of Ms. Waddell].

14. The payroll taxes were paid using the Taxpayer Access Point (TAP) system provided by

the Department. After each payment was made, the Department sent and the Taxpayer received a

confirmation email. Nowhere on the email does the confirmation email state that returns are also

required, or that no return was filed. [Testimony of Ms. Waddell].

15. The Taxpayer became aware of the omission on their own, when a different department

noticed an unexplained credit to the Taxpayer’s TAP account. The credit resulted from the Department

not knowing how to credit payments related to non-filing of required returns. The Taxpayer filed returns

for the periods at issue en masse on June 27, 2018. [Testimony of Ms. Waddell; Testimony of Ms.

Galewaler; Department Exhibit A-1 through A-7].

16. Any person who logged into the TAP system account for Taxpayer should have been able

to see the credit each time the person logged in to the TAP system. The TAP system has a function that

creates big, red notifications if something is amiss. [Testimony of Ms. Galewaler].

17. Once the correction takes place, the notifications go away, and there is no way to know if

anyone ever saw it, or to seek it out after the fact. There is no way to know if the payroll supervisor ever

saw this notification of credit balance, and Ms. Galewaler could not see any red notifications on this

account, since the proper adjustments had already been made by the time it got to protest. [Testimony of

Ms. Galewaler].

DISCUSSION

The sole issue in this protest is whether to abate assessed penalties resulting from Taxpayer’s failure

to timely file withholding tax returns on the CRS-1 combined form from November 2017 through May

2018. Taxpayer indicated that timely payments were made, but acknowledged that the returns were late.

Taxpayer asserts that abatement is appropriate because Taxpayer was not negligent, although not perfect,

In the Matter of the Protest of Wagner Equipment Co.
Page 4 of 9
and explained that they did the best they could under the unforeseen circumstances to ensure timely tax

compliance.

Burden of Proof

Under NMSA 1978, Section 7-1-17 (C), the assessments of tax issued in this case are presumed

correct. Unless otherwise specified, for the purposes of the Tax Administration Act, “tax” is defined to

include interest and civil penalty. See NMSA 1978, Section 7-1-3 (Y). 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-050, ¶16,

139 N.M. 498, 134 P.3d 785 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight). Taxpayers have the burden to overcome the assessments. See Archuleta v.

O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638. Taxpayer must show that it is entitled to

the abatement of civil penalties that is the basis of its tax protest.

Assessment of penalty for failure to file a return under NMSA 1978, Section 7-1-69.

Taxpayer conceded that the returns for November 2017 through May 2018 Withholding Tax were

filed late, on June 27, 2018. The payments were timely. Taxpayer asserts that penalties assessed under

NMSA 1978, Section 7-1-69 (A) should be abated because it acted in good faith and without negligence.

Taxpayer asserted that although it was not perfect, it acted reasonably, as a business would under similar

circumstances.

The law requires that “in the case of failure due to negligence or disregard of department rules and

regulations, but without intent to evade or defeat a tax … there shall be added to the amount assessed a

penalty.” NMSA 1978, Section 7-1-69. Penalties are assessed when a taxpayer does not pay taxes when

due, and in instances in which a taxpayer fails to file a tax return.

The Hearing Officer notes that the imposition of penalty is mandatory by virtue of the Legislature’s

use of the term “shall” in Section 7-1-69 (A), which establishes that an act is mandatory, not discretionary.

See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n, 2009-NMSC-013, ¶22, 146 N.M. 24, 206

In the Matter of the Protest of Wagner Equipment Co.
Page 5 of 9
P.3d 135. In this instance, the Department was obligated to assess a penalty for each month, or fraction of

a month, Taxpayer’s returns were late.

Section 7-1-69 (B) provides a limited exception to imposition of civil penalties: “[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.” The entirety of the evidence shows that Taxpayer did not

intentionally evade or defeat payment of tax. In fact, the Taxpayer paid taxes timely.

The question of whether Taxpayer made “a mistake of law made in good faith and on reasonable

grounds” is one of reliance after inquiry. Here, the Taxpayer was unable to present evidence that it

consulted with Department representatives. Taxpayer was unable to present evidence that it consulted with

a CPA to seek guidance. Taxpayer’s only evidence suggested that since they had been in compliance before

the veteran employee retired, that the best way to continue that trend was to seek information from her. A

taxpayer cannot “abdicate” their tax responsibilities “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.

The Department relied on Taxpayer’s negligence in timely paying to support the assessment of

penalty. 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.” The Department’s initial determination that

the Taxpayer was negligent for its “inaction” by not submitting timely returns was proper. See El Centro

Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶ 10, 108 N.M. 795

(Erroneous belief and inadvertent error meets the legal definition of “negligence” under the penalty statute).

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

subject to penalty, the regulations provide guidance for abatement of civil negligence penalty under

In the Matter of the Protest of Wagner Equipment Co.
Page 6 of 9
Regulation 3.1.11.11 NMAC. Taxpayer provided no evidence that fits into the list of the non-negligence

indications.

Arguing that the concept of negligence is one which does not require fitting the conduct into the

regulatory checklist, the Taxpayer’s evidence relied on what a reasonable person might do in a similar

situation, in an attempt to overcome the presumption of negligence. The evidence that Taxpayer kept its

retired employee under contract to provide part-time assistance remotely to give guidance and assist with

tasks is certainly a step in the right direction. Nevertheless, Taxpayer’s evidence did not show that it sought

assistance from any other source. Taxpayer did not consult with the Department, or a CPA of its own

choice, nor did it explore the TAP reporting system to gain a better understanding of what had been done,

and what was to be expected.

The purpose of applying a penalty is to deter and to punish. See Gea Integrated Cooling Tech. v.

State Taxation & Revenue Dep’t., 2012-NMCA-010, ¶ 13, 268 P.3d 48. The imposition of civil penalties

for the late filing of seven consecutive months of withholding tax returns is an error that justifies such

imposition, if for no other reason than to prevent it occurring with this Taxpayer in the future.

In this protest, with the evidence presented, the Taxpayer did not overcome the presumption of

correctness in the Department’s assessments of penalties, and it provided no grounds to abate the civil

negligence penalties.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s Assessment of penalty, and

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

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

(2015).

C. Taxpayer’s evidence did not overcome the presumption of correctness that attached to the

assessed penalty under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O’Cheskey, 1972-

NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638.

In the Matter of the Protest of Wagner Equipment Co.
Page 7 of 9
D. Taxpayer’s failure to timely report withholding taxes was due to Taxpayer’s negligence,

and penalty was properly assessed by the Department under NMSA 1978, Section 7-1-69 (2007). See El

Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶ 10, 108 N.M. 795.

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

Dated: November 20, 2018.

Ignacio V. Gallegos
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 (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 timely 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 proper

with the Court of Appeals, which occurs within 14-days of the Administrative Hearings Office receipt of

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

In the Matter of the Protest of Wagner Equipment Co.
Page 8 of 9
CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Decision and Order to the parties listed below this 20th

day of November 2018 in the following manner:

First Class Mail Interdepartmental State Mail

INTENTIONALLY BLANK

John D. Griego
Legal Assistant
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
PH: (505)827-0466
FX: (505)827-9732

In the Matter of the Protest of Wagner Equipment Co.
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