If my business only serves the federal government on a military base and I never knew I owed New Mexico gross receipts tax, can I be excused from the tax, penalty, and interest — especially when the state never gave me a straight answer?

Plain-English summary

M & R Janitorial Services, owned by Ron and Mary Bouchard, cleaned base housing exclusively for the federal government at Kirtland Air Force Base — readying vacated quarters for final inspection. The business started in 1986, but the Bouchards never asked the Department or a tax professional whether they owed gross receipts tax, and they didn't report or pay it.

In 1989, while helping their son set up his own business, they learned he would owe gross receipts tax and realized M & R might too. Mr. Bouchard asked a Department employee, Tom McKinney, whether a business performing services entirely on a federal military reservation for the federal government was subject to gross receipts tax. McKinney said he didn't think so but wasn't sure, and would look into it. He tried to reach Mr. Bouchard several times at his other job (the Social Security Administration), but a supervisor wouldn't let him take the calls, and the two never connected. The taxpayer never got a firm answer.

On February 15, 1995, the Department assessed $5,318.09 in gross receipts tax, $3,773.48 in interest, and $595.34 in penalty — $9,686.91 total — for January 1986 through June 1992. The taxpayer protested (and was granted a retroactive extension to do so). It did not dispute that its receipts were taxable; it argued only that it should be excused because it hadn't known and had never been told.

Hearing Officer Gerald B. Richardson denied the protest:

• Ignorance is not a defense. New Mexico has a self-reporting tax system, and "every person is charged with the reasonable duty to ascertain the possible tax consequences of his actions" (Tiffany Construction). Not knowing your receipts are taxable does not excuse the tax.
• The Department didn't mislead the business. The employee never gave a definitive answer, tried in good faith to follow up, and failed to connect through no fault of the Department. When the answer never came, it was the taxpayer's job to keep pursuing it — which it didn't.
• The negligence penalty was proper. Section 7-1-69(A) imposes a 2%-per-month penalty (up to 10%) for failure to pay due to negligence. Failing to find out one's tax obligations is negligence under Regulation TA 69:3.
• Interest is mandatory. Section 7-1-67(A) says interest "shall" be paid on unpaid tax "without regard to any extension of time or installment agreement." "Shall" is mandatory (State v. Lujan), so it doesn't matter why the tax went unpaid.

What this means for you

Working only for the federal government doesn't make you exempt

A business can perform its services entirely on a federal military base, for the United States, and still owe New Mexico gross receipts tax — the tax falls on the seller's receipts, and this taxpayer didn't even contest that. Don't assume a federal customer or a federal location removes the tax.

New Mexico is a self-reporting state — the duty to find out is yours

The system runs on taxpayers voluntarily identifying, reporting, and paying what they owe. Courts treat "I didn't know it was taxable" as negligence, not an excuse, because every business is expected to investigate its own tax consequences. Ask the questions before you open, not years later.

An inconclusive answer from the state doesn't protect you

Getting a "probably not, but I'm not sure" from a Department employee is not a ruling you can rely on. Because the Department never actually told this business it was exempt, there was nothing to be misled by — and when the follow-up never came, the taxpayer was expected to keep chasing the answer. For real protection, get a written determination.

Penalty and interest ride along with the tax

Once the tax is owed, the negligence penalty (up to 10%) and mandatory statutory interest attach, and interest runs regardless of the reason for nonpayment — even a good-faith misunderstanding. Here the interest alone was over $3,700 on about $5,300 of tax because it had accumulated for years.

Common questions

Q: My company only works for the federal government on a military base. Do I owe New Mexico gross receipts tax?
A: Very likely yes. Gross receipts tax is on your receipts as the seller, and this taxpayer didn't dispute that its base-cleaning receipts were taxable. Working for the federal government or on federal land does not, by itself, make you exempt.

Q: I honestly didn't know I owed the tax. Can that excuse me?
A: No. New Mexico is a self-reporting state, and not knowing your receipts are taxable is treated as negligence, not a defense. You're expected to determine your own tax obligations.

Q: I once asked a state employee and never got a clear answer. Am I off the hook?
A: No. An uncertain, unfinished conversation isn't a determination you can rely on, and here the Department never told the business it was exempt. When the answer didn't come, the duty to follow up was the taxpayer's.

Q: Can the penalty and interest be waived because I didn't know?
A: The negligence penalty applied precisely because the failure to find out was negligent, and interest under § 7-1-67(A) is mandatory no matter why the tax went unpaid. Neither was excused here.

Citations and references

Statutes and regulations:

• § 7-1-69(A) NMSA 1978 (1995 Repl. Pamp.) — negligence penalty of 2% per month, up to 10%, for failure to pay due to negligence or disregard of rules
• § 7-1-67(A) NMSA 1978 — interest on unpaid tax, "without regard to any extension of time or installment agreement"
• Regulation TA 69:3 — definition of taxpayer negligence (failure to exercise ordinary business care and prudence; inaction where action is required; inadvertence, indifference, carelessness, or erroneous belief)

Cases cited:

• 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 duty to ascertain the tax consequences of his actions; failing to do so is negligence
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" in a statute is mandatory unless a contrary legislative intent is clearly shown

Source

• Listing: New Mexico Decisions & Orders
• Decision post: M & R Janitorial Services
• Decision PDF: D&O 97-14

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 NO. 97-14
M&R JANITORIAL SERVICES
ID. NO. 02-225747-00 0, PROTEST
TO ASSESSMENT NOS. 1908153, 1908154,
AND 1902077 THROUGH 1902089

DECISION AND ORDER
This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

April 11, 1997. M&R Janitorial Services, hereinafter, "Taxpayer", was represented by its owners,

Ron and Mary Bouchard. The Taxation and Revenue Department, hereinafter, "Department",

was represented by Donald F. Harris, Special Assistant Attorney General. Based upon the

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

FINDINGS OF FACT

1. The Taxpayer is engaged in the business of performing cleaning services

exclusively for the federal government at Kirtland Air Force Base. Specifically, the Taxpayer

cleans base housing for final inspection after the military family previously assigned to the

quarters has vacated quarters.

2. The Taxpayer commenced its business in 1986.

3. At the time the Taxpayer commenced business, Mr. and Mrs. Bouchard did not

make inquiry with the Department or consult a tax professional about whether it would be liable

for gross receipts tax upon its receipts from performing services for the federal government. The

Taxpayer was simply not aware of its responsibility to report and pay gross receipts taxes upon its

gross receipts and it did not do so.

4. Sometime in 1989, Mr. and Mrs. Bouchard's son commenced a business of his

own and in getting set up, he learned that he would be responsible for paying gross receipts taxes
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to the Department upon his receipts from engaging in business. Because Mr. Bouchard was

involved in helping his son get set up in business, when he learned of his son's responsibility for

paying gross receipts taxes Mr. Bouchard realized that his business might also be liable for gross

receipts taxes upon its receipts.

5. Sometime in 1989, Mr. Bouchard spoke with an employee of the Department, Mr.

Tom McKinney and asked whether the Taxpayer was liable for gross receipts taxes upon its

receipts for performing services entirely upon a federal military reservation for the federal

government. Mr. McKinney said he didn't think the Taxpayer was subject to gross receipts tax

but he wasn't entirely sure of the answer and that he would look into the matter and contact Mr.

Bouchard.

6. Mr. McKinney attempted to contact Mr. Bouchard on several occasions at Mr.

Bouchard's place of employment (Mr. Bouchard also worked for the Social Security

Administration), but Mr. Bouchard's supervisor would not let Mr. Bouchard take Mr. McKinney's

calls. Mr. Bouchard would attempt to call Mr. McKinney back, but Mr. McKinney and Mr.
Bouchard never managed to speak about the Taxpayer's obligation for gross receipts taxes. Thus,

Mr. Bouchard never received a firm answer from the Department as to whether or not it was
subject to gross receipts upon its activities.

7. On February 15, 1995 the Department issued Assessment Nos. 1902077 through
   1902089 and 1908153 and 1908154 to the Taxpayer assessing $5,318.09 in gross receipts tax,

$3,773.48 in interest and $595.34 in penalty for a total of $9,686.91 for the reporting periods of

January 1986 through June of 1992.

8. On May 15, 1995 the Taxpayer mailed a letter to the Department protesting the
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assessments and requesting a retroactive 60 day extension of time to file its protest to the

assessments.

9. On June 22, 1995 the Department granted the Taxpayer's request for a retroactive

extension of time to file its protests.

DISCUSSION
The issue to be determined is whether the Taxpayer may be excused from paying gross

receipts tax, penalty and interest due to its failure to understand that its activities for the federal

government were subject to gross receipts tax and based upon the fact that the Taxpayer was never

told by the Department that its activities were subject to tax. The Taxpayer does not now dispute

that its activities are subject to gross receipts tax, but it wishes to be excused from payment of tax,

penalty and interest based upon its lack of knowledge that taxes were owning at the time the tax

was required to be reported and paid.

Although I have no doubt that the Taxpayer did not know or understand that its activities

were subject to tax and that there was no intentional failure to pay taxes, this does not and cannot

excuse the Taxpayer's failure to pay tax. New Mexico has a self-reporting tax system. This

means that the responsibility to accurately and timely pay taxes is placed upon taxpayers. It has

been well established in New Mexico law that every person is charged with the reasonable duty to

ascertain the possible tax consequences of his actions. 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).

In this case, the Taxpayer did not make any inquiry about its potential tax responsibilities
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at the time it commenced business. It was not until some three years later that it made such

inquiry. It never made inquiry of a private tax professional. When it made inquiry with the

Department, the employee informed the Taxpayer that it was not sure of the answer and that the

employee would get back to the Taxpayer with the answer. The Department's employee

attempted to make further contact with the Taxpayer, but was unsuccessful, through no fault of the

Department. Thus, the Taxpayer was never misled by the Department and when the Department

was unsuccessful in communicating the answer about taxability to the Taxpayer, it was incumbent

upon the Taxpayer to take further action to find out if taxes were owing. This, the Taxpayer did

not do. In any event, it is no defense to an assessment of tax that a taxpayer did not know or

understand that its activities were taxable.

The imposition of penalty is governed by the provisions of NMSA 1978, Section

7-1-69(A) NMSA 1978 (1995 Repl. Pamp.), which imposes a penalty of two percent per month,

up to a maximum of ten percent:
In the case of failure, due to negligence or disregard of rules and regulations, but without intent
to defraud, to pay when due any amount of tax required to be paid or to file by the
date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay

tax. Thus, there is no contention that the failure to report and pay taxes was based upon any

conscious attempt by the Taxpayer to underreport taxes. What remains to be determined is

whether the Taxpayer was negligent in failing to report its taxes properly. Taxpayer "negligence"

for purposes of assessing penalty is defined in Regulation TA 69:3 as:

1) failure to exercise that degree of ordinary business care and prudence which reasonable

taxpayers would exercise under like circumstances;
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2) inaction by taxpayers where action is required;

3) inadvertence, indifference thoughtlessness, carelessness, erroneous belief or inattention.

In this case the Taxpayer's failure to report and pay taxes was based upon the Taxpayer's

lack of knowledge about New Mexico taxes. As noted previously, New Mexico has a

self-reporting tax system which requires that taxpayers voluntarily report and pay their tax

liabilities to the state. Because of this, the case law is well settled that every person is charged

with the reasonable duty to ascertain the possible tax consequences of his actions, and the failure

to do so has been held to amount to negligence for purposes of the imposition of penalty pursuant

to Section 7-1-69 NMSA 1978. Tiffany Construction Co., supra.

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
(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.
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CONCLUSIONS OF LAW

1. The Taxpayer's filed a timely, written protest to the above-referenced assessments

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

2. The Taxpayer's failure to understand that it was subject to gross receipts tax upon

its receipts from performing services for the federal government does not excuse it from liability

for payment of such taxes.

3. The Taxpayer was negligent in failing to take action to determine the tax

consequences of its actions and penalty was properly imposed for failure to timely report and pay

gross receipts taxes.

4. The Taxpayer failed to timely report and pay gross receipts taxes upon its receipts

from performing services in New Mexico and interest was properly imposed.

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

DONE, this 18th day of April, 1997.