If you keep using old resale certificates and can't prove you paid another state's tax on out-of-state equipment, will New Mexico deny the deductions and charge use tax plus a penalty?

Plain-English summary

Amigos Mexican Foods, Inc. is a Deming food maker (tortillas, tamales, and other products) with a retail store and wholesale sales across New Mexico and into Colorado, Arizona, and Texas. A 1995 audit produced an assessment of about $9,425 in gross receipts tax and $1,637 in compensating (use) tax, plus penalty and interest. The company protested. The Hearing Officer granted the protest on one item and denied the rest.

• Gross receipts deductions — denied. Amigos sells wholesale to restaurants and others who resell the food, which is deductible under § 7-9-47 if the seller holds a proper nontaxable transaction certificate (NTTC) from each buyer. But a 1991 change to § 7-9-43 invalidated the old NTTCs for transactions after December 31, 1991 and required customers to get new "1992-series" certificates (with a $100 fee). Many of Amigos's customers refused to pay the fee, so Amigos kept honoring the old certificates and claiming deductions. The law requires the seller to possess the correct-series certificate when the return is due, and there is no "substantial compliance" exception — "shall" is mandatory (State v. Lujan). So the deductions unsupported by 1992-series NTTCs were disallowed, even though the Legislature later repealed the unpopular $100 fee.
• Use tax on out-of-state equipment — denied. Compensating tax applies to using property in New Mexico that was bought out of state in a transaction that would have been taxable here (§ 7-9-7(A)). Amigos bought restaurant equipment at Texas auctions and from Texas makers. Its president believed Texas sales tax had been paid, but the company had no invoices or records to prove it — so it couldn't rebut the assessment's presumption of correctness (§ 7-1-17(C)) or claim the credit for another state's tax (§ 7-9-79). The recordkeeping duty (§ 7-1-10) exists precisely so taxes can be computed accurately.
• Equipment in storage still counts as "use." One machine (an M/D dough divider) was bought in Texas, brought back, and never used — just stored. That didn't help: "use" is defined to include storage (other than storage for resale) under § 7-9-3(L), so compensating tax still applied.
• One win: the steamer kettle. Amigos bought a steamer kettle from a Las Cruces restaurant (a customer) that wasn't using it. That in-state purchase was not subject to compensating tax: the restaurant's sale would itself have been exempt as an isolated or occasional sale (§ 7-9-28), since the restaurant isn't in the business of selling equipment, and nothing about Amigos's use triggered gross receipts tax. The Department was ordered to remove that item.
• Penalties — upheld on both taxes. The negligence penalty (§ 7-1-69(A)) applied. On the use tax, not knowing about compensating tax is negligence in a self-reporting system (Tiffany Construction), and handing taxes to an accountant doesn't excuse it unless you disclosed the relevant facts and relied on the accountant's advice (El Centro Villa; Reg. 3 NMAC 1.11.11(4)) — which didn't happen. On the gross receipts tax, Amigos knew about the new certificates (it obtained them for its own purchases and received some from customers), so failing to inquire about the consequences was negligence; a mere belief that a transaction isn't taxable is itself negligence (C & D Trailer Sales).

What this means for you

Resale certificates: hold the current, correct one — "close enough" doesn't count

If you claim a resale deduction, you must actually possess the correct, current nontaxable transaction certificate from your buyer at the time your return is due. New Mexico allows no substantial-compliance defense: an outdated or wrong-series certificate means the deduction is disallowed, even if the sale really was a resale and even if your customers balk at paperwork or fees. When certificate rules change, get updated certificates from every buyer or charge the tax.

Use tax on out-of-state purchases: keep the invoices

Buying equipment out of state doesn't avoid New Mexico tax — compensating (use) tax fills the gap. If another state's sales tax was paid, you can credit it (§ 7-9-79), but only with proof: invoices or receipts showing the tax was charged and how much. A good-faith belief that "that state taxes everything" won't do it, because the assessment is presumed correct and you carry the burden. Keep purchase records for everything you bring into New Mexico for business use.

"Never used it, just stored it" is still taxable

Compensating tax reaches property you store in New Mexico, not just property you actively use. Buying equipment and leaving it in a warehouse (unless it's inventory held for resale) doesn't defer or avoid the tax. Plan for use tax when the item enters the state, regardless of whether you've put it into service.

A one-off purchase from a non-dealer may not trigger use tax

The taxpayer's single win is instructive: buying a used item from someone not in the business of selling that kind of property — here, a restaurant selling a kettle it happened not to need — can fall under the isolated/occasional-sale exemption, so no compensating tax is due. The compensating-tax hook for in-state purchases (§ 7-9-7(A)(3)) generally requires a transaction that should have been gross-receipts-taxable but wasn't because of how the buyer used the property.

Handing taxes to your accountant doesn't shift the blame

Delegating your returns to an accountant does not, by itself, protect you from penalties. You remain responsible for identifying the taxes that apply to your business. The narrow exception is when you fully disclose the relevant facts to the accountant and rely on their specific advice — so tell your preparer about out-of-state purchases, new certificate rules, and anything unusual, and keep a record of the advice.

Common questions

Q: My customers refused to get the new resale certificates. Why am I penalized?
A: Because the deduction depends on you holding the correct certificate, not on your customers' cooperation. There's no substantial-compliance exception. If a buyer won't provide a valid current certificate, you have to charge the tax on that sale.

Q: I'm sure I paid Texas sales tax on that equipment. Why do I owe New Mexico use tax?
A: You can credit another state's tax, but you must prove it was paid and how much — with invoices or receipts. Without records, you can't rebut the assessment or claim the credit, so New Mexico's compensating tax stands.

Q: I bought a machine but never used it — it's just sitting in storage. Is that taxable?
A: Yes. "Use" includes storage (other than storage for resale), so compensating tax applies even to equipment you never put into service.

Q: Why was the steamer kettle treated differently?
A: Because you bought it from a restaurant that isn't in the business of selling equipment, so that sale would have been an exempt isolated/occasional sale. There was no gross-receipts-taxable transaction to convert into compensating tax, so that assessment was removed.

Q: My accountant handles all this. Shouldn't that protect me from the penalty?
A: Not by itself. You're still responsible for knowing which taxes apply. The penalty is excused only if you disclosed the relevant facts to your accountant and relied on their advice, which wasn't shown here.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time — and the 1992-series certificate rules and $100 fee have since changed. It illustrates New Mexico's NTTC, use-tax, and penalty principles, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-47 NMSA 1978 — deduction for selling tangible personal property for resale, supported by a buyer's NTTC
• § 7-9-43(A) NMSA 1978 (1991 Supp.) — the seller must possess the required series of NTTC when the return is due (with a 60-day window to produce a pre-existing certificate on audit); no substantial-compliance exception
• § 7-9-7(A) NMSA 1978 — compensating (use) tax on property acquired out of state in a transaction that would have been subject to gross receipts tax in New Mexico; § 7-9-3(L) NMSA 1978 — "use" includes storage other than storage for subsequent resale
• § 7-9-28 NMSA 1978 — exemption for isolated or occasional sales by a person not regularly engaged in that business
• § 7-9-79(A) NMSA 1978 — credit against New Mexico compensating tax for sales, use, or similar tax paid to another state on the same property
• § 7-1-10 NMSA 1978 — duty to keep records permitting accurate computation of tax; § 7-1-17(C) NMSA 1978 — an assessment is presumed correct
• § 7-1-69(A) NMSA 1978 — negligence penalty of 2% per month up to 10%; Regulation 3 NMAC 1.11.10 — definition of negligence; Regulation 3 NMAC 1.11.11(4) — penalty relief where the taxpayer relied on an accountant's advice after full disclosure

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" is mandatory
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — taxpayers must ascertain the tax consequences of their actions; failing to do so is negligence
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — delegating to an accountant does not excuse the duty to know one's taxes; applies the Department's negligence regulation rather than a federal standard
• C & D Trailer Sales v. Taxation & Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979) — a mere belief that a transaction is not taxable is tantamount to negligence
• Gathings v. Bureau of Revenue, 87 N.M. 334, 533 P.2d 107 (Ct. App. 1975) — a federal negligence standard was used only by agreement of the parties, not adopted generally

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Amigos Mexican Foods, Inc.
• Decision PDF: D&O 97-24

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
AMIGOS MEXICAN FOODS, INC. NO. 97-24
ID. NO. 02-015615-00 4
PROTEST TO ASSESSMENT NO. 2012557

DECISION AND ORDER

This matter came on for formal hearing on June 11, 1997 before Gerald B. Richardson,

Hearing Officer. Amigos Mexican Foods, Inc., hereinafter, "Taxpayer", was represented by Gary

D. Eisenberg, Esq. The Taxation & Revenue Department, hereinafter, "Department", was

represented by Margaret B. Alcock, 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 a mexican food processing company, incorporated in 1984, which

makes tortillas, tamales and other mexican food products and is located in Deming, New Mexico.

It has a retail store in Deming and it sells its products at wholesale throughout New Mexico, and

also in Colorado, Arizona and Texas.

2. In late 1995, the Taxpayer was audited by the Department.

3. As a result of the Department's audit, on March 15, 1996 the Department issued
   Assessment No. 2012557, assessing the Taxpayer $9,425.27 in gross receipts tax, $1,637.33 in

compensating tax, $1,106.29 in penalty and $4,231.96 in interest.

4. On March 29, 1996 the Taxpayer filed a timely, written protest to Assessment No.

2012557.

5. The basis for the Department's assessment of gross receipts taxes was the Taxpayer's

failure to possess a proper form of nontaxable transaction certificate ("NTTC") to support
deductions it had claimed from gross receipts tax.

6. Because much of the Taxpayer's business is the wholesale sale of its mexican food
   products to restaurants and other businesses who resell the food, much of the Taxpayer's gross

receipts may be deducted pursuant to NMSA 1978, §7-9-47 when the Taxpayer has a NTTC issued

to it by its customers who resell the food to support its claim for deduction.

7. The 1991 legislature amended §7-9-43 governing NTTCs. It enacted a new

provision, subsection D, which had the effect of invalidating all NTTCs issued under the prior law

with respect to transactions occurring after December 31, 1991. For such transactions, taxpayers

issuing NTTCs must apply for the new "1992 series" NTTCs and pay a $100 fee with the

application for the new certificates. The law was also amended to tighten the requirements for

when a taxpayer must be able to demonstrate to the Department's auditors that they possess a valid

NTTC to substantiate a deduction. The old law had allowed taxpayers 60 days from notice from

the Department to come up with NTTCs and those NTTCs were honored as long as they were

issued before the expiration of the 60 days. The new law required that taxpayers demonstrate that

they had a valid NTTC at the time that they claimed the deduction, although they were still given 60

days to come up with the pre-existing NTTCs.

8. The Department attempted to widely notify taxpayers of the new requirements for

NTTCs and that the old NTTCs would not be valid for transactions occurring after December 31,

1991. The Department did this by putting a bold-faced notice of the new requirements on the front

page of the CRS-1 filers kits it mailed to all taxpayers who are registered with the Department to

report gross receipts tax, compensating tax and withholding tax. The filers kits are mailed every

six months and contain the taxpayer's monthly tax return forms. These kits were mailed for the

July through December, 1991 period, the January through June, 1992 period and the July through

December 1992 period.

9. The Taxpayer received these filers kits. The Taxpayer was aware of the

requirement to obtain the new 1992 series NTTCs because it applied for and got such certificates

for itself. The Taxpayer did not read the more detailed information about how the new

requirements for NTTCs were to operate because it turned over the filing kits to its accountant who

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prepares its monthly tax returns to be filed with the Department.

10. The Taxpayer had many customers who resented the new $100 fee to obtain the

1992 series NTTCs from the Department and who refused to apply for new NTTCs because of the

fee.

11. The Taxpayer continued to honor the old NTTCs it had from its customers and

continued to claim deduction for receipts from such customers for transactions occurring after

December 31, 1991.

12. The Taxpayer had NTTCs in its possession from most of its wholesale customers in

support of the deductions it claimed from gross receipts. The majority of the Department's audit

exceptions upon which the gross receipts tax assessment was based were due to the fact that the

Taxpayer did not have the new 1992 series NTTC from some of those customers.

13. The compensating tax was assessed upon the value (at Taxpayer cost) of certain

equipment purchased by the Taxpayer for use in its food manufacturing operation. Most of the

equipment was purchased at auctions of restaurant equipment which occurred in Texas or from

manufacturers of restaurant equipment in Texas. In one case, the Taxpayer was assessed

compensating tax on a large steamer kettle which it purchased from a Las Cruces restaurant, La

Sienda, which was a customer of the Taxpayer's. The restaurant was not using the kettle and Mr.

Arnulfo Orquez, the President of the Taxpayer, saw that it was not being used and asked the owner

of the restaurant if he was interested in selling it. In all cases where compensating tax was

assessed, the Taxpayer was unable to demonstrate with business records, such as invoices, that a tax

was paid on the purchase of the equipment at the time of its purchase or that compensating tax had

been paid by the Taxpayer on the purchase.

14. Mr. Orquez believes that sales tax was charged and paid on the purchase price of all

of the equipment purchased in Texas.

15. One of the pieces of equipment upon which compensating tax was assessed was a

machine called an M/D divider. It is used to make rounds of tortilla dough which can then be

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rolled out into tortillas in a tortilla press. The Taxpayer purchased it for $15,184 in San Antonio,

Texas. It was brought back to the Taxpayer's business, but it was put into storage and has never

been used by the Taxpayer.

DISCUSSION
The Taxpayer contests the assessment of gross receipts tax, compensating tax and penalty.

Each of these issues will be addressed separately.

The assessment of gross receipts tax arose from the Department's denial of deductions

claimed by the Taxpayer for the sale of its products to restaurants and other customers who resell

the products. Receipts from such sales are deductible, pursuant to NMSA 1978 §7-9-47, when the

purchaser provides a proper form of NTTC to the seller to support a deduction from tax. The

problem in this case arose because in 1991 the legislature amended §7-9-43 to provide that after

December 31, 1991, the old form of NTTCs would no longer be valid for transactions occurring

after that date. A new "1992 series" NTTC was provided for and a $100 fee was enacted for the

privilege of executing the new type NTTCs. See, NMSA 1978, §7-9-43 (1991 Supp.) Although

the Taxpayer was aware of the requirement to obtain the new 1992 series NTTCs, and it did so

itself for issuance to the vendors it purchased from, many of the Taxpayer's customers strenuously

objected to the requirement that they pay a $100 fee to obtain the new certificates and they refused

to do so. The Taxpayer did not require that its customers provide it the new NTTCs and it

continued to sell its products to those customers, honoring the old NTTCs, not charging gross

receipts tax to those customers, and claiming a deduction from tax based upon the old NTTCs it

had from those customers. The Department, upon audit, disallowed those deductions for

transactions after July 1, 1992 where the Taxpayer was unable to demonstrate possession of the

new 1992 series NTTC.

The Taxpayer argues that since these transactions were clearly sales for resale which were

supported by the previously valid NTTCs, that it has substantially complied with the requirements

for deduction and the deductions should be allowed. The Taxpayer also asks for consideration of

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the difficulty of its circumstances because its customers were adamant about not paying the fee to

obtain the new NTTCs but were also adamant about purchasing the Taxpayer's products without the

cost of the gross receipts tax passed on to them.

While I am sympathetic to the business realities the Taxpayer faced in dealing with its

customers and I am aware that the legislature, in response to a large outcry from businesses, saw the

folly of the $100 fee and later repealed the requirement, the law does not allow an exception for

"substantial compliance" with the tax laws. NMSA 1978, §7-9-43(A) (1991 Supp.) provides in

pertinent part as follows:
The provisions of the subsection apply to transactions occurring on or after July 1,
1992. All nontaxable transaction certificates of the appropriate series executed by
buyers or lessees shall be in the possession of the seller or lessor for nontaxable
transactions at the time the return is due for receipts from the transactions. If the
seller or lessor does not demonstrate possession of any required nontaxable
transaction certificates to the department at the commencement of an audit or
demonstrate within sixty days from the date that the notice requiring possession of
these nontaxable transaction certificates is given the seller or lessor by the
department that the seller or lessor was in possession of such certificates at the time
receipts from the transactions were required to be reported, deductions claimed by
the seller or lessor that require delivery of these nontaxable transaction certificates
shall be disallowed. (emphasis added).

Should there be any doubt that the legislature intended strict enforcement of its requirement that

sellers possess the proper form of NTTC in order to claim a deduction, the legislature's choice of
the word "shall" removes any doubt. This is because 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). Thus, there is simply no allowance for

substantial compliance with the requirement to possess the correct form of NTTC to support a

claim of deduction. A failure to meet the statutory requirements results in the denial of the

deductions claimed.

The Taxpayer also disputes the compensating tax assessed. The vast majority of the

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compensating tax assessed was assessed on the value of equipment which the Taxpayer purchased

out-of-state. Mr. Orquez testified that in general, much of the restaurant equipment he purchased

for his business was bought at auction in Texas. Other equipment was purchased from

manufacturers in Texas because it was not available in New Mexico. Mr. Orquez testified that he

believes that Texas sales tax was paid on those transactions, but upon audit, the Taxpayer had been

unable to produce invoices or other business documents to establish that sales tax was paid and the

amount of such tax. Mr. Orquez testified specifically with regard to two pieces of equipment.

One was something called an M/D divider, which makes rounds of dough to be rolled out flat into

tortillas. It was purchased in San Antonio, Texas and brought back to the Taxpayer's place of

business, where it was put in storage and has never been used by the Taxpayer in its business. The

second piece of equipment is a steamer kettle which the Taxpayer purchased from one of its

customers who operates a restaurant in Las Cruces. These transactions will be discussed

separately.

In general, the compensating tax is intended to complement the gross receipts tax by

imposing a tax on the use of property which was purchased in circumstances, (such as an

out-of-state transaction) where no gross receipts tax was imposed. The compensating tax equalizes

the tax burden so that there is no tax advantage to make purchases out of state or in a manner which

avoids the imposition of gross receipts tax.

Compensating tax on the use of tangible personal property is imposed by NMSA 1978,

§7-9-7(A), which provides:
For the privilege of using tangible property in New Mexico, there is imposed on the
person using the property an excise tax equal to five percent of the value of tangible
property that was:
(1) manufactured by the person using the property in the state;
(2) acquired outside this state as the result of a transaction that would have
been subject to the gross receipts tax had it occurred within this state; or
(3) acquired as the result of a transaction which was not initially subject to
the compensating tax imposed by Paragraph (2) of this subsection or the gross
receipts tax but which transaction, because of the buyer's subsequent use of the
property, should have been subject to the compensating tax imposed by Paragraph
(2) of the subsection or the gross receipts tax.

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There is also a credit against compensating tax imposed on property purchased out-of-state

provided by NMSA 1978, §7-9-79(A), which provides as follows:
If on property bought outside this state, a gross receipts, sales, compensating or
similar tax has been levied by another state or political subdivision thereof on the
transaction by which the person using the property in New Mexico acquired the
property or a compensating, use or similar tax has been levied by another state on
the use of the property subsequent to its acquisition by the person using the property
in New Mexico and such tax has been paid, the amount of such tax paid may be
credited against any compensating tax due this state on the same property.

The Taxpayer argues that by Mr. Orquez' testimony that with respect to the equipment purchased in
Texas he believes that Texas sales tax was imposed, that the Taxpayer has met its burden of

overcoming the presumption of correctness which attached to the assessment of compensating tax.

NMSA 1978, §7-1-17(C) provides for such a presumption.

While I find Mr. Orquez to be an honest and credible witness, I find his testimony to be a

little too vague or general to effectively rebut the presumption of correctness. He provided little

testimony as to specific items which were picked up for compensating tax by the Department's

auditors. The only items he specifically testified to were the M/D divider, the steamer kettle and a

sink and exhaust fan. With respect to the sink and exhaust fan, he testified that he thought it was

bought in Texas at auction, but his testimony was not certain. He further testified that at auctions

in Texas, there was a sign posted that all purchases were subject to tax. There was no proof of the

amount of tax, however. No proof was presented as to the rest of the items upon which

compensating tax was assessed, other than Mr. Orquez's general statement that he believed most

items were purchased in Texas at auction and that sales taxes were imposed on those purchases.

NMSA 1978, §7-1-10 provides as follows:
Every person required by the provisions of any statute administered by the
department to keep records and documents and every taxpayer shall maintain books
of account or other records in a manner that will permit the accurate computation
of state taxes or provide information required by the statute under which he is
required to keep records.

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The purpose of this provision is stated in its text, to permit the accurate computation of state taxes.

In this case, the documents which would establish that sales taxes were imposed by Texas and the

amount of taxes paid would be the receipts or purchase invoices for the equipment at issue. While

I found Mr. Orquez to be both honest and credible, his recollection of these sales was too vague or

general to rely upon to allow the offsetting credit provided at §7-9-79. For instance, Mr. Orquez

assumed that he was charged sales tax on the purchase of the M/D divider because Texas

businesses must pay taxes to the aggressive Texas taxing authorities. This assumes that businesses

will pay taxes because of the tax consequences to them if they don't do so. Yet, Mr. Orquez, by his

own testimony, admitted that he sold his mexican food products through his retail operation to

businesses that brought in migrant farm workers during harvest season and that he did not charge

them gross receipts tax and claimed a deduction for such sales even though the purchasers did not

provide him with the NTTC to support such a claim of deduction. Mr. Orquez testified that he was

afraid he would lose the business to his competitors if he insisted on collecting tax. This testimony

reflects that sometimes a business may make a business decision not to charge and pay taxes.

Thus, the fact that a state imposes a sales or other tax on purchases does not provide much in the

way of proof that such taxes were, in fact, charged to the customer. Given the statutory

requirement that records be maintained to be able to accurately compute taxes and given the general

nature of Mr. Orquez' testimony, I do not find that the taxpayer has overcome the presumption of

correctness of the compensating tax assessment.

With respect to the M/D divider, the Taxpayer also argues that since the compensating tax is

imposed upon the privilege of using property in New Mexico and since the equipment was never

used in the business, but was merely stored, that compensating tax should not be assessed on the

value of that equipment. Unfortunately for the Taxpayer, "use" is defined broadly to encompass

storage. Specifically, NMSA 1978, §7-9-3(L) defines use to include, "use, consumption or storage

other than storage for subsequent sale in the ordinary course of business..." Thus, no relief can be

granted with respect to the tax assessed on this item.

8
I do find, however, that the Department incorrectly assessed compensating tax on the value

of the steamer kettle which the Taxpayer purchased from a Las Cruces restaurant. Nothing in

§7-9-7 imposes compensating tax on such a transaction. The circumstances in which

compensating tax is assessed on an in-state transaction is where the property was acquired as a

result of a transaction which was not initially subject to gross receipts tax, but because of the

purchaser's subsequent use of the property, it should have been subject to the gross receipts tax.

§7-9-7(A)(3). This covers situations such as where a purchaser delivers an NTTC stating that he

will resell something, but the purchaser uses the item for its own personal use, instead. In this

case, the sale by the restaurant in Las Cruces would not have been initially subject to the gross

receipts tax because the restaurant could have claimed the exemption for isolated and occasional

sales found at NMSA 1978, §7-9-28, which provides as follows:
Exempted from the gross receipts tax are the receipts from the isolated or occasional
sale of or leasing of property or a service by a person who is neither regularly
engaged nor holding himself out as engaged in the business of selling or leasing the
same or similar property or service.

The testimony indicates that the restaurant from which the Taxpayer purchased the steamer kettle is

not regularly engaged in the business of selling restaurant equipment since the steamer was only

sold to Mr. Orquez because he noticed it wasn't being used and asked if he might buy it. Thus, the

transaction would have been exempt from gross receipts tax under §7-9-28. There is nothing about

the Taxpayer's subsequent use of the steamer kettle which would invoke the imposition of gross

receipts tax on that transaction. The compensating tax assessment should be adjusted accordingly.

The final issue to be determined is the propriety of the assessment of penalty. The

imposition of penalty is governed by the provisions of NMSA 1978, Section 7-1-69(A) NMSA

1978, 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,....

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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 3 NMAC 1.11.101 as:

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

reasonable taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

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

inattention.

In arguing that penalty should not be imposed, the Taxpayer argues that with respect to the gross

receipts tax, that the Taxpayer did the best it could under the circumstances. It had NTTCs from

virtually all of its customers, although some were of the pre-1992 series so that they were no longer

effective. The Taxpayer also points out that the legislature has since amended §7-9-43 to do away

with the $100 fee for NTTCs as well as reinstating the 60 day grace period in which to obtain

NTTCs necessary to support claims of deduction upon audit, although those amendments did not go

into effect in time to provide any relief to the Taxpayer for the period under audit. Nonetheless,

the Taxpayer argues that the legislative amendments reflect that the legislature reconsidered the

harshness of its previous changes to the law regarding NTTCs. With respect to the penalty for

failure to report and pay compensating tax, the Taxpayer argues that it was not aware of the

requirements to pay compensating tax and it was never informed of the need to pay such tax by its

accountant who prepared its taxes. Finally, the Taxpayer argues for the adoption of the federal

standard of negligence, as found at 26 U.S.C. §6662(b)(1) which imposes a penalty for the

underpayment of tax due to negligence or disregard of rules and regulations. In making this

argument, the Taxpayer argues that the Court of Appeals, in El Centro Villa Nursing Center v.

1
formerly cited as Regulation TA 69:3

10
Taxation and Revenue Department 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) erroneously cited

to 26 U.S.C §6651(a), which imposes a penalty for late payment of tax or the failure to pay reported

tax except when the late or absent payment is due to "reasonable cause and not due to willful

neglect", and therefore erroneously concluded that the federal penalty provision and the state

penalty provision were not comparable because of the different standards for imposition of penalty.

While I do find merit to the Taxpayer's argument that §6662(b)(1) contains language which far

more closely tracks the language of §7-9-69(A) than that of §6651(a), nonetheless, New Mexico's

courts have never adopted any federal standard of negligence when determining whether penalty is

applicable under §7-1-69. The only case of which I am aware of which used the federal standard

was Gathings v. Bureau of Revenue, 87 N.M. 334, 533 P.2d 107 (Ct. App. 1975). In that case,

the federal statutory standard used was that of §6651(a) of the Internal Revenue Code, and it was

used by agreement of the Department and the taxpayer. As noted by Judge Alarid in El Centro

Villa:
Contrary to the Taxpayer's reliance on Gathings v. Bureau of Revenue, (citation
omitted) this court did not hold that "negligence in Section 7-1-69(A) is to be
equated with `lack of reasonable cause,' for which a penalty is assessed under federal
law, 26 U.S.C. §6651(a) (Supp. Pamp. 1988), in all cases. In Gathings, taxpayers
asserted reasonable cause for failure to pay taxes and this court weighed that cause
against evidence of the taxpayer's negligence on agreement of the parties.
(emphasis added).

Judge Alarid went on to reject using the caselaw developed under §6651(a) of the Internal Revenue

Code and applied the definition of "negligence" found in the Department's Regulation 69:3, which

is set forth above as 3 NMAC 1.11.10. Even though there is much more identity between the
language of I.R.C. §6662(b)(1) and §7-1-69, I see no reason to adopt the federal caselaw under

§6662 when there is a well established body of law interpreting taxpayer negligence under
§7-1-69(A) to guide me in determining whether penalty was properly imposed under that section.

With respect to the imposition of penalty for failure to report and pay compensating tax, the
imposition of penalty is proper. In this case the Taxpayer's failure to report and pay compensating

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taxes was based upon Mr. and Mrs. Orquez' lack of knowledge about New Mexico's compensating

taxes. 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. 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). Nor does the fact that the Taxpayer turned over the responsibility for reporting its taxes to

an accountant excuse the Taxpayer for failure to report and pay compensating taxes. The El

Centro Villa case determined that a taxpayer cannot escape its responsibility for ascertaining the

possible tax consequences of its actions merely by appointing an accountant as its agent in tax

matters. The only exception to this rule is when a taxpayer has relied upon the advice of his

accountant as to the taxpayer's liability after full disclosure of all relevant facts. Regulation 3

NMAC 1.11.11 (4). In this case, there was no allegation that Mr. or Mrs. Orquez revealed to their

accountant that they made purchases of equipment out-of-state and sought advice as to whether

there were any tax consequences to such actions from their accountant.

The imposition of penalty for underpaying gross receipts taxes by erroneously claiming

deductions for sales which were not supported by proper NTTCs is also proper. The Taxpayer

understood that it needed to obtain the new form certificates when it made purchases which were

subject to deduction by its vendors, and the Taxpayer applied for and obtained the 1992 series

certificates for its own use. It also received the new NTTC forms from many of its customers. At

the very least, then, the Taxpayer should have had some inkling that things had changed with regard

to deductions supported by NTTCs and the Taxpayer's failure to inquire of its accountant or the

Department about the consequences of failing to obtain new certificates from some of its customers

constitutes negligence insofar as such actions may be characterized as erroneous belief, inattention

or carelessness. A taxpayer's mere belief that a transaction is not taxable, without more, is

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tantamount to negligence. C & D Trailer Sales v. Taxation & Revenue Department, 93 N.M.

697, 604 P.2d 835 (Ct. App. 1979).

Although the imposition of penalty may seem to the Taxpayer to be unduly harsh in this

case, there are sound policy reasons behind the imposition of penalty. A self-reporting tax system

relies upon taxpayers accurately reporting their tax liabilities to the government. There are

insufficient government resources to audit every taxpayer periodically to otherwise assure tax

compliance. The imposition of penalty provides taxpayers with an incentive to understand the tax

consequences of their actions and to accurately report their taxes. Otherwise, if the only

consequence of an audit and determination of underpayment of tax was the payment of the tax

which was owed, it would always advantage a taxpayer to remain ignorant of the tax requirements

and if they should happen to be audited and assessed, to pay the taxes.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2012557, pursuant to

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

protest.

2. The Department properly denied the deductions claimed by the Taxpayer for which

the Taxpayer either lacked a NTTC or it lacked the 1992 series NTTC to support its claim for

deduction.

3. The Taxpayer failed to present sufficient evidence to rebut the presumption of

correctness which attached to the assessment of compensating tax on purchases of equipment
purchased from out-of-state vendors.

4. The Taxpayer failed to present sufficient evidence to establish its right to a credit,
   pursuant to NMSA 1978, §7-9-79 for taxes paid to other taxing jurisdictions on its purchases of

equipment from out-of-state vendors.

5. The Taxpayer was erroneously assessed compensating tax on the value of a steamer

kettle purchased from La Sienda restaurant in Las Cruces, New Mexico.

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6. The Taxpayer was negligent in failing to report and pay compensating tax on its

purchases from out-of-state vendors and penalty was properly imposed for failure to report and pay

compensating tax.

7. The Taxpayer was negligent in failing to understand or take action to learn the tax

consequences of not obtaining 1992 series NTTCs from some of its wholesale customers and

penalty was properly imposed for failure to report and pay all gross receipts taxes due.

For the foregoing reasons, THE TAXPAYER'S PROTEST IS GRANTED WITH

RESPECT TO THE ASSESSMENT OF COMPENSATING TAX UPON ITS IN-STATE

PURCHASE OF A STEAMER KETTLE AND IS OTHERWISE DENIED. THE

DEPARTMENT IS ORDERED TO ADJUST THE COMPENSATING TAX ASSESSED IN

CONFORMITY WITH THIS DECISION.

DONE, this 1st day of July, 1997.

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