Accidents and computer failures made me pay my gross receipts tax late — can New Mexico's negligence penalty be waived for hardship?

Plain-English summary

Rio Rancho Pharmacy got behind on its CRS-1 taxes — the combined return used to report gross receipts and other state taxes — for December 1992, January 1993, and February 1993. What happened wasn't ordinary carelessness. The pharmacy's president and pharmacist, Jaime Sirgany, was badly hurt in a fall in 1992 and, with a pregnancy, couldn't work full-time on-site for about a year. Her bookkeeper was also seriously injured and left unable to work. On top of that, the pharmacy's computer system repeatedly failed, destroying financial and patient records that had to be rebuilt by hand.

Because the pharmacy's own records showed checks as having been issued for these tax payments, Ms. Sirgany didn't initially realize the state had never been paid — the checks were never cashed and never cleared the bank. The Department, having received nothing, issued estimated assessments in early 1995 that were much higher than the real tax. The pharmacy then computed and paid the actual tax in 1995, and the Department replaced the estimates with penalty-and-interest-only assessments: penalties of $692.45, $503.12, and $819.97 for the three months. The pharmacy protested the penalty (and withdrew its interest protest at the hearing).

Hearing Officer Ellen Pinnes called it "a difficult decision" but denied the protest:

• The penalty requires negligence, and hardship can excuse it — at first. The § 7-1-69(A) penalty applies only when a late payment is due to negligence or disregard of rules, not merely because it was late. Regulation TA 69:4 lists excusing circumstances including disability from injury or illness and damage to records — both plainly present here. The Hearing Officer found the pharmacy's initial failure was not negligent; it was caused by factors beyond its control.
• But the excuse expired, and the delay didn't. By some point in 1994, Ms. Sirgany was back at work full-time, the computer records had been reconstructed, and the pharmacy's accountant had identified exactly which checks hadn't cleared — so the pharmacy knew the state hadn't been paid. Yet it made no payment until 1995, after the Department's assessments. Once the excusing circumstances were gone, continuing to delay became negligent, and the penalty properly attached.
• The maximum 10% applied. The penalty is 2% of the tax per month up to a 10% cap reached after five months. At least five months passed between when the excuse ended and when payment was finally made, so the full 10% was proper.
• Interest is mandatory and wasn't really in dispute. The pharmacy withdrew its interest protest. The Hearing Officer explained that § 7-1-67 interest (then 15%) is required with no exceptions — it isn't a penalty but compensation for the state's lost use of the money — and neither the Department nor the Hearing Officer can lower the rate.

What this means for you

A genuine hardship can defeat the penalty — but only for as long as it actually disables you

New Mexico's negligence penalty isn't automatic. If injury, serious illness, or destroyed records truly prevented you from filing or paying, Regulation TA 69:4 can excuse it. The catch is that the excuse lasts only while the hardship does. This pharmacy's misfortunes were real and the Hearing Officer was sympathetic, but the moment the owner was back at work and the accountant had pinpointed the unpaid checks, the clock on "reasonable cause" stopped.

Once you know a tax is unpaid, pay it promptly — don't let it wait behind other priorities

The pharmacy sensibly rebuilt its patient-care records first, but the decision faults it for not also making "reasonable efforts" to meet its tax obligations once it could. Choosing to delay a known, quantified tax debt in favor of other business needs is exactly the kind of "disregard" the penalty targets. If you discover an unpaid liability, treat paying it as its own priority.

"I thought the check went out" is not a permanent shield

Uncashed checks that never cleared the bank explained why Ms. Sirgany didn't initially know the tax was unpaid — a fair point the Hearing Officer credited. But that only covered the period before the discrepancy was found. Reconcile issued checks against what actually clears your account, and once you spot a check that never cleared a taxing agency, act on it.

Interest is not the penalty — and it never gets waived

The pharmacy dropped its interest protest for good reason. Interest under § 7-1-67 is mandatory, statute-set, and compensates the state for money it should have had. Even a taxpayer who genuinely didn't know a debt existed pays it in full. Budget for interest separately from any argument you might have about the penalty.

Common questions

Q: I paid my gross receipts tax late because of a serious injury. Can the penalty be waived?
A: Possibly, for the period the injury actually prevented you from filing or paying. Regulation TA 69:4 recognizes disability from injury or prolonged illness as a circumstance that can show a lack of negligence. But the excuse ends when you're able to act again — continued delay after that can be penalized.

Q: The pharmacy had real hardships and the Hearing Officer was sympathetic. Why did the penalty still apply?
A: Because the hardships stopped excusing the delay at a certain point. By 1994 the owner was back at work and the accountant had identified the unpaid checks, yet payment wasn't made until 1995. Delay after the excuse expired was treated as negligence.

Q: My check to the state never cleared the bank. Does that get me off the hook?
A: It can explain why you didn't realize the tax was unpaid at first, which the Hearing Officer credited here. But once you discover a check never cleared, you're expected to pay promptly; letting it sit becomes negligent.

Q: Can I fight the interest along with the penalty?
A: Usually not successfully. Interest under § 7-1-67 is mandatory and set by statute, with no exceptions, and neither the Department nor a hearing officer can reduce it. The pharmacy here withdrew its interest protest for that reason.

Citations and references

Statutes and regulations:

• § 7-1-69(A) NMSA 1978 — negligence penalty of 2% of the tax per month, up to a 10% maximum, imposed when a late filing or payment is due to negligence or disregard of rules and regulations
• Regulation TA 69:4 (3 NMAC 1.11.11) — lists circumstances that may show a lack of negligence and excuse the penalty, including taxpayer disability from injury or prolonged illness and damage to records
• § 7-1-67 NMSA 1978 — interest (then 15% per year) "shall" be paid on any tax not paid when due; compensation for the state's lost use of the money, not a penalty
• § 12-2-2(I) NMSA 1978 — "shall" and "must" are construed as mandatory unless a contrary legislative intent is clearly shown

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 demonstrated

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Rio Rancho Pharmacy
• Decision PDF: D&O 97-05

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
RIO RANCHO PHARMACY, I.D. No.
02-045862-00 2, PROTEST TO No. 97-05
Assessment Nos. 1958951, 1958952
and 1958953, Docket No. 96-04-28

DECISION AND ORDER

This matter came on for hearing on January 9, 1997 before Ellen Pinnes, Hearing Officer.

Rio Rancho Pharmacy ("the Taxpayer") was represented by its president, Jaime Sirgany, R.Ph. The

Taxation and Revenue Department ("the Department") was represented by Frank D. Katz, Special

Assistant Attorney General.

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer, Rio Rancho Pharmacy, does business as a pharmacy in Rio Rancho,
   New Mexico.

2. The assessments at issue, Nos. 1958951, 1958952 and 1958953, involve taxes owed
   by Rio Rancho Pharmacy for the months of December 1992, January 1993 and February 1993.

The taxes underlying the assessments were those required to be reported in the CRS-1 return, which
is used to report gross receipts, compensating, and withholding taxes.

3. The Department did not receive timely CRS-1 tax reports or tax payments from Rio

Rancho Pharmacy for these three months.

4. Assessments for these taxes, with penalty and interest, were originally issued to the

Taxpayer in February and March 1995. (See Department Exhibits 1 through 3.) Those
assessments were based on estimates by the Department, as the Department at that time had not

received tax reports from the Taxpayer for these months. The estimated amounts were significantly

higher than the tax amounts ultimately determined to be due.

5. The Taxpayer determined the actual amount of tax owed for each month and paid

the taxes in 1995.

6. After the taxes were paid, the Department on September 7, 1995 issued Assessment

Nos. 1958951, 1958952 and 1958953 for penalty and interest on the amount of tax determined to be

due, in lieu of the earlier assessments based on estimated amounts. Thus, the assessments at issue

here are for penalty and interest only and not for the taxes themselves. The penalty amounts are

$692.45 for December 1992, $503.12 for January 1993, and $819.97 for February 1993.

7. The precise date on which the Taxpayer paid the taxes due for December 1992

through February 1993 is not established in the record. Payment was made at some time between

March 1995, when the original assessments were issued, and September 1995, the date of the revised

assessments.

8. The Taxpayer filed a timely protest of the assessments by its letter dated September

10, 1995.

9. The Taxpayer originally protested imposition of both interest and penalty. At the

hearing, the Taxpayer sought clarification from the hearing officer regarding imposition of interest,

and withdrew its protest of the interest. The Taxpayer continues to protest the penalty imposed.

10. The Taxpayer maintained its financial and tax data, along with other information

pertaining to its business operations, in a computerized records system. That system listed checks as

having been issued for payment of the taxes due with the CRS-1 report, at the time those payments

were due.

11. The Taxpayer does not have copies of either the returns or the checks for December

1992 through February 1993 or for other months in 1992 which are not at issue here. The checks

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shown as having been issued for payment of taxes due for December 1992 through February 1993

were never cashed and did not clear the Taxpayer's bank account.

12. The Taxpayer's president and pharmacist, Jaime Sirgany, R.Ph., was responsible for

overseeing accounting and tax work done by the Taxpayer's employees who handled these tasks. It

was Ms. Sirgany who reconciled checks issued by the Taxpayer and those that cleared the company's

bank account.

13. The Taxpayer's bookkeeper who handled federal and state tax payments appeared to

Ms. Sirgany to be handling her job competently. However, while this staff member was on vacation

in 1992, Ms. Sirgany became aware that there were discrepancies in the reporting and payment of

the company's federal tax obligations.

14. The bookkeeper was injured in a serious accident in late 1992 or early 1993, leaving

her bedridden and no longer able to work.

15. Ms. Sirgany also had a serious accident in the fall of 1992. Due to injuries suffered in

the accident and to Ms. Sirgany's pregnancy, she was unable to work full-time at the Taxpayer's

premises for approximately a year, from late 1992 to late 1993. During this time, she did some work

from her home based on paperwork delivered to her there. One of the tasks she handled during

this time was attempting to correct problems with the Taxpayer's federal tax payments.

16. Following Ms. Sirgany's return to work at the pharmacy in late 1993, she became

aware that the balance in the company's bank account was higher than it should have been, indicating

that some checks issued were not clearing the bank.

17. The Taxpayer has had significant difficulties with its computerized records systems,

due to power outages and other problems. Large amounts of data have been lost from the system,

with extensive work being required on the part of the Taxpayer to go manually through hard copy

records and reconstruct both financial/administrative and patient care records.

18. The Taxpayer began a process of reviewing and reconstructing its records in early

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1994. A certified public accountant (CPA) was hired to review financial records and correct errors.

It is not clear whether this CPA was part of the firm earlier used by the Taxpayer to handle its

accounting matters, or whether the Taxpayer hired a new accountant at this time. It took some

months for the accountant to complete the review and identify which of the Taxpayer's checks had

not cleared the bank.

19. In reconstructing records lost due to computer failures, the Taxpayer gave priority to

reconstruction of pharmacy and medical records relating to patient care. Reconstruction of financial

records was delayed while the Taxpayer devoted its efforts primarily to the recreation of patient care

records.

20. Recreating financial records pertaining to payment of gross receipts taxes entailed

going manually through cash register tapes and compiling the information.

21. Ms. Sirgany acknowledged that she was aware of problems with tax reporting and

payments, but that due to the extensive difficulties the Taxpayer was experiencing with

record-keeping on both financial and patient care information and her own disability, she was

"overwhelmed" and unable to deal with everything at once. In setting priorities for what would be

dealt with first, she chose to give precedence to patient care rather than to tax payment.

DISCUSSION

Penalty
The New Mexico Tax Administration Act provides that a penalty will be imposed in certain

circumstances when a taxpayer does not file a return or pay tax at the time it is due. The penalty is

not based simply on failure to file a return or make payment on time. Rather, such failure must be

due to negligence or disregard of rules and regulations. NMSA 1978, § 7-1-69(A).

The amount of the penalty is two percent of the tax, for each month from the date on which

it was due, up to a maximum of ten percent. Section 7-1-69(A)(1). Thus, the penalty is imposed for

a maximum of five months, regardless of how long the tax remains unpaid after its due date.

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Regulation TA 69:4 (3 NMAC 1.11.11) lists some situations which may indicate a lack of

negligence or disregard of rules and regulations and thereby excuse a late filing or payment, so that no

penalty will be imposed. Among these situations are taxpayer disability due to injury or prolonged

illness, and damage to a taxpayer's records.

The Department acknowledged here that at least part of the Taxpayer's delay in filing returns

and paying taxes due may have been excused due to the accidents in which Ms. Sirgany and the

Taxpayer's bookkeeper were injured and the computer problems experienced by Rio Rancho

Pharmacy. However, the Department contended that even if a portion of the delay in payment by

Rio Rancho Pharmacy was excused, the delay was too long to be fully justified. Accordingly, the

Department argued, even if the Taxpayer's original failure to file its returns and pay taxes owed for

December 1992 through February 1993 was excused under § 7-1-69, the penalty became effective at

a later time when the excuse was no longer valid.

This case presents a difficult decision. It is uncontested that the Taxpayer suffered various

setbacks that interfered with its timely submission of tax returns and payments. These setbacks

included the injuries and pregnancy of Ms. Sirgany which rendered her unable to work full-time or

to be present at the business premises for approximately a year, from late 1992 through late 1993, as

well as injuries to the bookkeeper who handled tax reporting tasks.

Moreover, Ms. Sirgany was not immediately aware that the taxes owed to the state for

December 1992 through February 1993 had not been paid, because the Taxpayer's records showed

checks as having been issued for these payments. Although Ms. Sirgany at some point realized that

not all checks issued were clearing the company's bank account, she initially did not focus on the

checks issued in payment of CRS-1 taxes for the months at issue here.

The business has experienced repeated problems with its computerized record keeping

systems. When these problems occurred, requiring extensive reconstruction of computer data from

hard copy through a manual process, the Taxpayer properly gave first priority to efforts to reconstruct

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patient care data rather than administrative items. However, while the Taxpayer acted properly in

giving precedence to recreation of pharmacy and medical information, it was also required to make

reasonable efforts to do what was necessary to meet its tax reporting and payment obligations. The

record does not establish that this was done.

Ms. Sirgany was aware of problems with making accurate and timely tax payments by early

1993, as indicated by her March 3, 1993 letter to the Internal Revenue Service (Ex. A). Although

there is no indication in this letter that Ms. Sirgany knew of any discrepancies involving state rather

than federal taxes, it is clear that she had notice that tax payment was an area of difficulty for the

Taxpayer.

Because earlier discrepancies had related to payment of federal taxes, and because the

Taxpayer's records showed timely submission of state tax payments, Ms. Sirgany may have had no

reason to realize that checks issued to the Department in payment of state taxes were among those

that had not cleared the bank. She therefore may not have had any reason to focus on those checks

when the Taxpayer attempted to determine which checks were causing the discrepancy in the

company's bank balance.

However, the record indicates that the uncashed checks would have been identified well

before the Taxpayer ultimately paid the overdue taxes. Ms. Sirgany testified that the Taxpayer

began reconstructing tax and financial records in early 1994 and that the process took a period of

some months. Yet tax payments for the months at issue were not made until some time in 1995,

after the Department issued estimated assessments in February and March of that year. While a

portion of the delay in submitting returns and payments for December 1992 through February 1993

appears to have been excused under § 7-1-69, the delay lasted beyond that period.

The Taxpayer was clearly in a difficult position. It is not surprising that, as a small business

person struggling against not only its competitors in the market but a number of unforeseen

difficulties in the form of personal injuries and computer breakdowns, Ms. Sirgany had difficulty

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complying with the requirements of the tax system. It appears that the Taxpayer's failure to file its

tax returns and payments for the period at issue here initially was not negligent or due to disregard of

applicable rules and regulations, but was instead due to factors beyond the Taxpayer's control.

However, at a certain point, non-payment was no longer justified by these factors. Adequate

time had passed to correct errors made by the Taxpayer's bookkeeper, and Ms. Sirgany herself had

long since returned to work on a full-time basis. Computer records were reconstructed and an

accountant had completed review of financial records and identified those checks that had not

cleared the bank. Thus, by some time in 1994, the Taxpayer was aware that the tax payments it

believed had been made for December 1992 through February 1993 had not been received by the

Department. Yet no action was taken to make the payment until March 1995 or later, after the

Department had issued assessments to the Taxpayer for the missing payments.

Ms. Sirgany testified that she was "overwhelmed" by the many problems facing the company

and was unable to address all of them promptly. She also noted that payments of tax, penalty and

interest imposed a financial burden on the company. The hearing officer is sympathetic to these

difficulties. It is clear that Ms. Sirgany has had the poor fortune to experience considerable setbacks

through no fault of her own.

However, it appears that, at some point, the Taxpayer chose to delay payment of its tax

obligations and to focus instead on other business needs. While the delay in payment may have

been excused even as late as some time in 1994, any such excuse ceased by the time the accountant

identified those checks that hadn't cleared the bank. The Taxpayer's failure to make payment at that

time was negligent or in disregard of applicable rules and regulations, and the penalty authorized by §

7-1-69(A) was properly imposed.

It is not clear exactly when the penalty became applicable. Nor is the precise date on which

the Taxpayer paid the taxes established in the record, though it was no earlier than March 1995.

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The maximum penalty accrues after a period of five months.1 It appears that at least five months

passed between the latest date on which the Taxpayer's late payment was excused under § 7-1-69 and

the date on which payment was made. The maximum ten percent penalty was therefore properly

imposed.

Interest

At the hearing in this matter, the Taxpayer withdrew its protest insofar as it related to interest

imposed on late payment of taxes. The following is set out to clarify the issue of interest for the

Taxpayer.

NMSA 1978, § 7-1-67 provides for the imposition of interest on tax deficiencies:
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 ... until it is paid ... .

B. Interest due to the state under Subsection A ... shall be at the rate of fifteen percent
a year ... . (Emphasis added.)

It is a well settled rule of statutory construction that the word "shall" is mandatory rather than

discretionary, unless a contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103,

560 P.2d 167 (1977). The New Mexico legislature has expressly reiterated this general rule in NMSA

1978, § 12-2-2(I) (in construing statutory provisions, the words "shall" and "must" are to be construed

as mandatory unless this would be inconsistent with manifest legislative intent or repugnant to the

context of the statute).

Section 7-1-67 requires that interest, at the rate of 15% per year, be imposed on the amount of

any unpaid taxes. No exceptions to this rule are provided for. Interest is intended to compensate the

state for the time-value of money which was not paid when it was due. It may be unpleasant to pay

interest on monies owed, particularly where the taxpayer is for some time unaware of the existence of

the debt, as was the case here. However, interest is not a penalty for late payment. It is, rather, a

1
The penalty applies for each month or fraction thereof in which the tax is due but not paid.
NMSA 1978, § 7-1-69(A)(1).

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means of making a creditor whole through reimbursement for not having had the use of the money

during the time it remained unpaid. While the interest rate imposed here may seem high, that rate has

been set by the legislature in the statute, and both the Department and the hearing officer lack the

authority to reduce it.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely protest of Assessment Nos. 1958951, 1958952 and

2. Jurisdiction thus lies over the parties and the subject matter of this protest.

3. The Taxpayer does not contest these assessments insofar as they are for interest based

on late payment of tax. The validity of interest imposed therefore is not before the hearing officer for

decision.

3. The Taxpayer failed to pay gross receipts and other taxes required to be reported on the

CRS-1 reporting form for December 1992 through February 1993, at the time those taxes were due.

4. The Taxpayer's failure to pay the taxes was negligent and/or in disregard of applicable

rules and regulations, and penalties were properly imposed on the unpaid amounts.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 10th day of February, 1997.

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