If a New Mexico store wrongly claimed the out-of-state (interstate commerce) sales deduction and later concedes the tax, can it still get the negligence penalty removed?

Plain-English summary

Broken Arrow Indian Arts, Inc. ran a retail shop on the plaza in Taos selling Indian jewelry, Kachinas, and other artwork. From 1988 to 1993 it claimed New Mexico's interstate-commerce deduction (§ 7-9-55) on some of its sales — treating them as tax-free out-of-state sales. On audit, the Department disallowed those deductions and, in 1994, assessed about $53,365 in gross receipts tax plus penalty and interest.

After an informal conference and more documentation, the Department substantially reduced the assessment: it allowed the deduction for sales it could tie to shipping documents showing an out-of-state address (mostly credit-card sales), leaving a much smaller bill of $5,321.27 in tax, $532.17 in penalty, and $4,908.46 in interest for January 1991 through May 1993. The remaining disputed sales were cash and check sales made in the store to customers who asked that the item be shipped out of state. The store stopped contesting the tax and interest on those sales and protested only the penalty.

The Hearing Officer upheld the penalty. Under § 7-9-55, an out-of-state sale is deductible only if title and risk of loss pass to the buyer outside New Mexico — the point the Department's Regulation 55:10 and Ruling 450-89-10 both make. The penalty statute (§ 7-1-69) applies to a negligent failure to pay, and — importantly — the presumption of correctness that attaches to a tax assessment under § 7-1-17(C) also attaches to a penalty. That put the burden on the store to show it acted reasonably. Although represented by "very competent counsel," the store called no witnesses and offered no evidence — nothing to show where title and risk of loss actually passed, and nothing to show it had known about or relied on the regulation or ruling its lawyer cited. With no evidence to rebut the presumption, the penalty stood and the protest was denied.

What this means for you

Retailers who ship goods to out-of-state customers

Simply shipping an item out of state does not automatically make the sale tax-free in New Mexico. The interstate-commerce deduction under § 7-9-55 turns on where title and risk of loss pass. If the customer takes delivery, or title/risk passes, in New Mexico — as often happens with an in-store cash-and-carry purchase that the customer then asks you to ship — the receipts are taxable, even if the box later leaves the state. Build your records (invoices, shipping documents, delivery terms) so they show out-of-state passage of title if you intend to claim the deduction.

Any taxpayer protesting only a penalty

This case is a sharp reminder that a penalty assessment is presumed correct, just like the tax. Conceding the tax does not shift the burden — you still have to come forward with evidence that your position was reasonable and non-negligent. Argument from counsel is not evidence. If you want a penalty abated for reasonable cause or non-negligence, put on the witnesses and documents that show what you knew and why you acted as you did.

Accountants and tax professionals

The decision confirms that the § 7-1-17(C) presumption of correctness extends to penalties under § 7-1-69, citing Tiffany Construction and Champion International. To defeat a negligence penalty, the taxpayer must produce affirmative evidence — here, evidence of where title/risk of loss passed and of actual reliance on Regulation 55:10 or Ruling 450-89-10. Note also the interaction with § 7-1-18(D): once the Department's adjustments dropped the underreported percentage, the extended limitation period was no longer available, which is why the sustained assessment covered only 1991 onward.

Common questions

Q: The store admitted it owed the tax — why did it still owe a penalty?
A: Because the penalty is assessed separately for negligence and carries its own presumption of correctness. Conceding the tax did not establish that the store had acted reasonably. Without evidence to rebut the penalty, the presumption of correctness controlled and the penalty was upheld.

Q: When is an out-of-state sale actually deductible under § 7-9-55?
A: When the transaction is truly in interstate commerce — specifically, when title and risk of loss pass to the buyer outside New Mexico. If the buyer takes delivery or title/risk passes in New Mexico (common for an in-store cash purchase that is later shipped), the receipts are taxable.

Q: The store had a good lawyer — why wasn't that enough?
A: Legal argument is not evidence. The store presented no witnesses and no documents showing where title and risk of loss passed or that it had relied on the cited regulation and ruling. With nothing in the record to overcome the presumption of correctness, the penalty had to be upheld.

Q: Does this decision apply to my business?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico applies the interstate-commerce deduction and the negligence penalty, but your facts and evidence may lead to a different result.

Citations and references

Statutes and regulations:

• § 7-9-55 NMSA 1978 — deduction for receipts from transactions in interstate commerce (turns on out-of-state passage of title and risk of loss)
• § 7-1-69(A) NMSA 1978 — penalty for negligent failure to pay (2% per month, up to 10%)
• § 7-1-17(C) NMSA 1978 — presumption of correctness of an assessment, which also applies to penalties
• § 7-1-18(D) NMSA 1978 — extended limitation period, unavailable once the underreported percentage dropped after adjustments
• § 7-1-24 NMSA 1978 — taxpayer protest procedure
• 3 NMAC 1.11.10 — definition of negligence for penalty purposes
• Regulation 55:10 (now 3 NMAC 2.55.12.2) — receipts are not deductible under § 7-9-55 where the nonresident takes delivery, or title/risk of loss passes, in New Mexico
• Ruling 450-89-10 — receipts are deductible where delivery occurs and title and risk of loss pass outside New Mexico

Case law 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) — the presumption of correctness applies to penalty assessments
• Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975) — the taxpayer must present evidence to dispute the factual correctness of an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Broken Arrow Indian Arts, Inc.
• Decision PDF: D&O 97-46

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
BROKEN ARROW INDIAN ARTS, INC. NO. 97-46
ID. NO. 02-010634-00 3, PROTEST TO
ASSESSMENT NO. 1777618

DECISION AND ORDER

THIS MATTER came on for formal hearing on December 9, 1997 before Gerald B.

Richardson, Hearing Officer. Broken Arrow Indian Arts, Inc., hereinafter, “Taxpayer”, was

represented by Patricia Tucker, Esq. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Bruce J. Fort, 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 was a New Mexico corporation which operated a retail sales

establishment located on the plaza, in Taos, New Mexico, during the period from January 1,

1988 through May 31, 1993. The Taxpayer derived its income from sales of Indian art items,

including jewelry, Kachinas, and other artwork.

2. On its gross receipts tax returns for the periods from January 1, 1988 through May

31, 1993, the Taxpayer reported its sales receipts and claimed a deduction for a portion of those

receipts. The Taxpayer took these deductions in reliance on Section 7-9-55 NMSA 1978, for

sales to out-of-state buyers.

3. On audit, deductions claimed were disallowed on the grounds that these receipts

were from sales which did not qualify as out-of-state sales.

4. On March 25, 1994 the department mailed Assessment No. 1777618 to the

Taxpayer. The assessment assessed $53,365.14 in gross receipts tax, $5,336.54 in penalty and

$27,681.67 in interest for the reporting periods January 1, 1988 through May 31, 1993.

5. On April 25, 1994 the taxpayer filed a timely, written protest to Assessment No.

1777618, contesting the entire assessment.

6. Following an informal conference between the parties and the Taxpayer’s

submission of additional documentation, a revised audit report was issued. The Department

allowed deductions for receipts from sales made to customers who made their purchase by credit

card and for which the customer’s name could be linked with a shipping document which

showed shipment to an out-of-state address. The Department also allowed deductions for other

sales which could be linked to shipping documents showing an out-of-state address. No

adjustments to the assessment were allowed, however for sales by cash or check. Certain

deductions taken for receipts from repairs were also not allowed.

7. After the adjustments made by the Department, the assessment was reduced to the

following amounts: $5,321.27 in gross receipts tax, $532.17 in penalty and $4,908.46 in interest

computed through December 15, 1997. Because of the Department’s adjustments to the

assessment, which reduced the percentage of underreported taxes, the Department could no

longer assess for the extended period of limitation on the assessment of tax pursuant to Section

7-1-18(D) NMSA 1978. Accordingly, the assessment period represented by the reduced

assessment is January of 1991 through May of 1993.

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8. The Taxpayer no longer contests the adjusted amount of tax and interest, but does

protest the imposition of penalty under the reduced assessment.

9. The sales at issue are sales made to customers who purchased merchandise from

the Taxpayer at the Taxpayer’s business who requested that the merchandise be shipped to an

out-of-state address and who paid for the purchase by cash or check at the time of the purchase

transaction.

10. The Department’s auditor, when auditing the Taxpayer prior to the Department’s

issuance of the assessment at issue, concluded that with respect to the Taxpayer’s sales to

customers who requested that merchandise be shipped out-of-state, that two transactions

occurred. The first was the sale of goods where title or risk of loss passed in New Mexico and

the second transaction was a contract for the shipment of goods to the buyer.

DISCUSSION

The sole issue to be determined herein is whether penalty was properly assessed against

the Taxpayer under the circumstances of this case. The Taxpayer no longer contests that tax was

due on its cash transactions where the customer requested shipment of the merchandise to an out-

of-state location.

The imposition of penalty is governed by the provisions of NMSA 1978, Section 7-1-

69(A)(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,....

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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 1.11.10 (formerly TA 69:3) 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.

The Taxpayer argues that it was not negligent in failing to pay tax on the transactions at

issue because it believed that those sales were subject to the deduction provided at Section 7-9-55

NMSA 1978 for transactions in interstate commerce based upon Regulation 55:10 (now codified at

3 NMAC 2.55.12.2) and Ruling 450-89-10.

Regulation 55:10 provided in pertinent part:

Receipts of New Mexico sellers from sale of property to
nonresidents of New Mexico who accept delivery of the property in
New Mexico or where transfer of title or risk of loss passes to the
nonresident buyer in New Mexico are not receipts from transactions
in interstate commerce and are not deductible under Section 7-9-55.

Ruling 450-89-10 provides as follows:

X is engaged in the business of selling tangible personal property at
retail. An out-of-state purchaser selects an item at X’s place of
business in New Mexico and requests that it be shipped to, and
delivered at the purchaser’s home out of New Mexico. X estimates
the packing and shipping costs and the customer pays for the
merchandise and the packing and shipping charges. X packs the
item and arranges for shipping with the U.S. Postal Service or a
common carrier such as UPS. X pays the shipper for shipping and
insurance. If the shipment is lost or damaged, the shipper reimburses

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X for the lost or damaged goods and X in turn refunds that amount to
the out-of-state purchaser.
X inquires concerning whether or not X’s receipts from the above
transaction is subject to the gross receipts tax.

Since delivery of the property occurs outside of New Mexico and
since both risk of loss and title to the property pass to the purchaser
outside of New Mexico, X’s receipts are deductible under the
provisions of Section 7-9-55 NMSA 1978. (emphasis added).

It is apparent from both the ruling and the regulation, that whether risk of loss and transfer of title

occurs in New Mexico or out of state is pivotal in determining whether the transaction qualifies

for deduction under Section 7-9-55.

In this case, although the Taxpayer was represented at the formal hearing by very

competent counsel, the Taxpayer declined to send any witnesses to provide any evidence to be

considered in determining this protest. There is a presumption of correctness which attaches to

any assessment of tax pursuant to Section 7-1-17(C) NMSA 1978. The presumption of

correctness also attaches to any penalty assessed pursuant to Section 7-1-69. 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). This means that the duty rests upon a taxpayer to

present evidence tending to dispute the factual correctness of the assessments and to overcome

this presumption. Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d

1300 (Ct. App. 1975). In this case, the Taxpayer failed to present evidence to dispute the

presumption of correctness of the penalty assessment. We have no evidence to establish where

title and risk of loss passed for the transactions at issue to establish whether the Taxpayer could

have reasonably concluded that the transactions qualified for deduction, nor do we have any

evidence to establish that the Taxpayer was aware of and relied upon either the regulation or

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ruling cited by counsel. In the absence of such evidence the assessment of penalty is presumed to

be correct and the assessment must be upheld.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely protest to Assessment No. 1777618 pursuant to

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

this protest.

2. The presumption of correctness which applies to the assessment of taxes pursuant

to Section 7-1-17(C) NMSA 1978, also applies to the assessment of penalty.

3. By failing to present evidence with respect to the assessment of penalty, the

Taxpayer has failed to rebut the presumption of correctness which applied to the penalty

assessment and the assessment must be upheld.

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

DONE, this 31st day of December, 1997.

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