I moved from a no-income-tax state and didn't know I owed New Mexico tax — can I avoid the interest?

Plain-English summary

Robert and Marilyn Davidson moved to New Mexico in the spring of 1990 after living 30 years in Texas, which has no state income tax. Mr. Davidson, a retired philosophy professor, began teaching part-time at Santa Fe Community College that fall. No New Mexico income tax was withheld from his pay, and — unaccustomed to any state income tax — it simply didn't occur to the couple that they owed one, so they filed no 1990 New Mexico return. In 1993, after the Department contacted them about a different year, they learned they were subject to New Mexico income tax, and they promptly requested, filed, and paid returns for 1990, 1991, and 1992.

The Department then assessed interest ($216.39) and a penalty ($61.10) on the late-paid 1990 tax. It abated the penalty, leaving only the interest, which the Davidsons protested — arguing that, given their good faith and prompt correction, the interest should be abated too. Hearing Officer Gerald B. Richardson denied the protest:

• Interest is mandatory. Section 7-1-67(A) says interest "shall" be paid on any tax not paid when due, until it's paid, with no exceptions (State v. Lujan). It doesn't matter why the tax was late.
• Interest is not a penalty. It compensates the state for the time-value of money it should have received on time. The rate is set by the Legislature and the Department can't change it.
• We have a self-reporting tax system. Every taxpayer has a duty to determine their own tax obligations and pay accordingly (Tiffany Construction). The Department's power to assess doesn't shift that responsibility.
• The penalty was already gone. The provisions meant to punish (§ 7-1-69, for negligence or fraud) had been abated, so the couple faced only interest — and their good faith, while real, is irrelevant to interest.

What this means for you

Moving from a no-income-tax state doesn't excuse New Mexico income tax

If you relocate to New Mexico from a state like Texas that has no income tax, you become subject to New Mexico income tax on income earned here — even if no tax is withheld and even if it never crossed your mind. Check your New Mexico filing obligations as soon as you begin earning income in the state.

Interest is automatic and cannot be waived for good faith

Unlike a penalty, interest on late tax is mandatory and applies no matter how innocent the reason for the delay. Acting in good faith, promptly fixing the mistake, or never intending to avoid tax will not get interest removed. Budget for interest separately from any penalty argument.

Penalty and interest are different — and only the penalty can be forgiven

The Department can abate a penalty where the taxpayer wasn't negligent (as it did here), but it has no authority to abate interest. If you're contesting an assessment, focus your relief arguments on the penalty; interest on tax that was genuinely late will stand.

The duty to know your tax obligations is on you

New Mexico's self-reporting system puts the responsibility to identify and pay your taxes on you, not the state. "No one told me" and "nothing was withheld" don't relieve that duty. When in doubt about a new type of income or a new state, confirm your obligations early.

Common questions

Q: I honestly didn't know New Mexico taxed my income. Can the interest be waived?
A: No. Interest under § 7-1-67 is mandatory on any late tax, with no exceptions, regardless of good faith or the reason for the delay. Lack of knowledge doesn't excuse it.

Q: Isn't charging me interest just a way of punishing me?
A: No. Interest is not a penalty — it compensates the state for the time-value of money it didn't have while your tax went unpaid. The separate penalty provisions (§ 7-1-69) are the punitive ones, and here that penalty was abated.

Q: My penalty was removed. Why do I still owe interest?
A: Because penalty and interest are distinct. A penalty can be abated when you weren't negligent, but the Department has no power to waive interest on tax that was paid late.

Q: No tax was withheld from my pay. Isn't that the payer's problem?
A: Not for your liability. In a self-reporting system you're responsible for determining and paying your own tax. If withholding doesn't cover it, you still owe the tax when due — and interest if it's late.

Citations and references

Statutes:

• § 7-1-67(A) NMSA 1978 — if any tax is not paid on or before its due date, interest "shall" be paid from the day after the due date until paid, without regard to any extension of time or installment agreement
• § 7-1-69 NMSA 1978 — penalties for negligent failure to pay tax and for willful failure with intent to defraud (the negligence penalty assessed here was abated by the Department)
• § 7-1-24 NMSA 1978 — timely written protest of an assessment

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" in a statute is mandatory rather than discretionary unless a contrary legislative intent is clearly shown
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — every person has a reasonable duty to ascertain the tax consequences of their actions and to report and pay accordingly

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Robert & Marilyn Davidson
• Decision PDF: D&O 96-18

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
ROBERT AND MARILYN DAVIDSON,
PROTEST TO ASSESSMENT NO. 559742. No. 96-18

DECISION AND ORDER

This matter came on for hearing before Gerald B. Richardson, Hearing Officer, on

June 18, 1996. Robert and Marilyn Davidson (hereinafter "Taxpayers") represented themselves

at the hearing. The Taxation and Revenue Department (hereinafter "Department") was

represented by Gail MacQuesten, Special Assistant Attorney General.

Based upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers moved to New Mexico in the Spring of 1990. For thirty years

prior to moving to New Mexico, the Taxpayers lived in the state of Texas, which has no income

tax.

2. Mr. Davidson is a retired professor of philosophy, ethics and logic. In the Fall of

1990, Mr. Davidson began teaching at the Santa Fe Community College on a part-time basis.

3. No New Mexico income tax was withheld from the compensation Mr. Davidson

was paid by the Santa Fe Community College and because Mr. Davidson was not accustomed to

paying state income taxes, it did not occur to him that he was subject to state income tax upon his

compensation for teaching in New Mexico. Accordingly, no 1990 New Mexico personal income

tax return was filed by the Taxpayers.

4. In the Spring of 1993, the Taxpayers were contacted by the Department, which

inquired of the Taxpayers why no 1989 personal income tax return had been filed by them. That

matter was cleared up with the Department when the Taxpayers provided evidence that they did
not reside in New Mexico during 1989. In the course of clearing up 1989, however, the

Taxpayers learned that they were subject to income taxation by the Department upon their income

earned in New Mexico.

5. The Taxpayers requested personal income tax returns for the years 1990, 1991 and

1992 from the Department and subsequently filed returns with the Department and paid any taxes

due.

6. On October 15, 1993, the Department issued Assessment No. 559742 to the

Taxpayers assessing $216.39 in interest and $61.10 in penalty with respect to the late payment of

the Taxpayer's 1990 personal income taxes.

7. On November 11, 1993, the Taxpayers filed a written protest of Assessment No.

559742 with the Department.

8. The Department has abated the penalty portion of Assessment No. 559742.

DISCUSSION
The sole issue to be determined herein is whether the Department's assessment of interest

should be abated based upon the Taxpayer's lack of knowledge that they were subject to income

taxation by the State of New Mexico and with consideration given to the fact that when they

learned they were subject to tax, they took measures to properly report their taxes.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies
and provides as follows:
A. If any tax imposed is not paid on or before the day on which it becomes due, interest
shall be paid to the state on such amount from the first day following the day on
which the tax becomes due, without regard to any extension of time or installment
agreement, until it is paid. (emphasis added)

It is a well settled rule of statutory construction that the use of the word "shall" in a statute

indicates that the provisions are intended to be mandatory rather than discretionary, unless a

contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167

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(1977). Applying this rule to Section 7-1-67, the statute requires that interest be paid to the state

on any unpaid taxes and no exceptions to the imposition of interest are countenanced by the

statute. Thus it doesn't matter why taxes were unpaid. Interest is imposed for the period of time

that they are unpaid.

The underlying premise of the Taxpayers' argument is that they feel that the imposition of

interest is a punishment or penalty for their failure to timely play tax. While I have no doubt of

the good faith with which the Taxpayers acted and that they did not intend to avoid paying their

proper share of taxes, the Taxpayers argument misapprehends the nature of interest. While it

may be painful to pay interest, especially at the rate that the statutes require, interest is not a

penalty. It is intended to compensate the state for the time-value of those tax monies which it did

not receive when they were due. While one may quibble with the interest rate imposed by the

state, that is a matter of policy, established by the legislature, which the Department has no power

to change.

The Taxpayers' argument also misapprehends the nature of our tax reporting system. We

have a self-reporting tax system in this country which imposes the responsibility upon taxpayers

to properly report and pay their taxes. While taxing authorities have the power to assess taxes

when they have not properly been reported, this does not shift the primary responsibility from the

individuals subject to taxation. Every person is charged with the reasonable duty to ascertain the

possible tax consequences of his actions and to report and pay taxes accordingly. Tiffany

Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct.App. 1976), cert.

denied, 90 N.M. 255, 561 P.2d 1348 (1977).

Finally, I would note that there are provisions in the law intended to penalize taxpayers for

failing to properly report and pay taxes. Section 7-1-69 NMSA 1978 contains provisions for

penalties for both negligent failure to pay tax and for failure to pay tax which is done willfully,

and with the intent to defraud the state. Although the Taxpayers herein were initially assessed a

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penalty for negligent failure to pay, the Department has abated that portion of the assessment.

Thus, in this case, the Taxpayers have only been assessed with interest to compensate the state for

not getting the tax revenues due to it when those revenues were due from the Taxpayers. Since

the Taxpayers' relative fault or lack of fault in failing to pay their tax in a timely manner is

irrelevant to the imposition of interest, the Taxpayers' protest must be denied.

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CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest to Assessment No. 559742 pursuant

to Section 7-1-24 NMSA 1978 and jurisdiction lies over both the parties and the subject matter of

this protest.

2. Interest was properly imposed upon the Taxpayers for failing to timely pay taxes

which were owed by them.

3. The imposition of interest is for the purposes of compensating the government for

the value of the use of money which was due to it but not paid in a timely manner, and is not for

the purposes of penalizing those who fail to make timely payment.

For the foregoing reasons, the Taxpayers protest IS HEREBY DENIED.

DONE, this 12th day of July, 1996.

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