If an electronic tax payment fails through no human error and arrives late, does the taxpayer owe interest and a negligence penalty?

Plain-English summary

New Mexico State University's Office of Business and Finance is a large taxpayer required to pay its taxes electronically under § 7-1-13.1, using an automated clearinghouse (ACH) transfer through its bank. Its $382,139.44 payment for the October 1996 period was due Monday, November 25, 1996. On the Friday before (November 22 at 3:03 p.m.), NMSU initiated the ACH transfer; its computer screen indicated the transmission had gone through, and the bank's system was up and receiving.

But the transmission silently failed — for a reason no one ever identified (a power surge or phone-line glitch). NMSU discovered the problem through its backup fax-confirmation procedure, re-sent the payment on November 26, and the state received the money on November 27 — two days late. The Department assessed a $7,642.79 penalty and $4,776.74 in interest (Assessment No. 2092065). NMSU protested both.

The Hearing Officer split the decision — granted in part, denied in part:

• Interest stood (strict liability). Section 7-1-67 says interest "shall" be paid on any tax not paid when due — a mandatory, no-exceptions standard. It doesn't matter why the payment was late; the tax was concededly paid late, so the interest was proper. (NMSU's argument that shifting money between two state institutions is pointless didn't change the rule.)
• The penalty was abated (no negligence). The § 7-1-69(A) penalty requires negligence, defined in Regulation 3 NMAC 1.11.10 as a failure to use ordinary business care. Here there was no human error — the failure came from the electronic transmission itself, both computer systems were functioning, and NMSU's screen had indicated the transfer succeeded, so any reasonable person would have believed the payment went through. The Hearing Officer distinguished every prior negligence decision, which had all involved some human error, and found NMSU exercised ordinary business care. The penalty was ordered abated.

The Hearing Officer did note some concern about waiting until the last possible day to send an ACH payment, but on these unusual facts it wasn't enough to make NMSU negligent.

What this means for you

Large taxpayers who pay electronically

An electronic-payment mandate doesn't guarantee the payment goes through. If your ACH transfer fails silently and your tax lands late, expect to owe interest no matter what — it's strict liability. Whether you also owe the penalty turns on negligence, so build in safeguards: use your bank's confirmation/backup procedures, and don't wait until the deadline day, when a single glitch leaves no time to fix it before the tax is late.

Anyone hit with a late-payment penalty after a technical failure

This decision shows the penalty can be abated — but the key was that the failure was a genuine electronic malfunction with no human error, and the taxpayer had reasonable systems (including a backup confirmation step) that made the payment appear successful. If a person forgot, mis-keyed, or ignored a warning, the result is usually different. Document exactly what failed and what your normal safeguards are.

Accountants and tax professionals

Note the sharp line between the two collection tools: § 7-1-67 interest is strict-liability and non-abatable, while the § 7-1-69(A) penalty requires negligence and can be abated when the taxpayer used ordinary business care. The Hearing Officer's distinguishing factor was the absence of any human error — a useful benchmark when contesting a penalty after a failed electronic transmission, even though the same facts won't relieve interest.

Common questions

Q: The payment failed for a reason no one could identify — why did NMSU still owe interest?
A: Because interest under § 7-1-67 is mandatory and effectively strict liability. The statute allows no exceptions, so the reason for the lateness — even an unexplained electronic failure — doesn't excuse it.

Q: Why was the penalty thrown out when the interest wasn't?
A: The penalty requires negligence. The Hearing Officer found none: the failure was in the electronic transmission, not in anything a person did, both systems were working, and NMSU's screen confirmed the transfer. That's ordinary business care, so the penalty was abated even though the interest stood.

Q: Does it help to pay right at the deadline?
A: The Hearing Officer expressed concern about waiting until the last possible day, because a single glitch then leaves no time to fix the payment before it's late. Paying earlier gives you room to catch a failed transfer and avoid both interest and a penalty argument.

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. It illustrates how New Mexico treats interest versus penalty after a failed electronic payment, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-1-13.1 NMSA 1978 — requires certain taxpayers to pay by methods (including ACH) that make funds available to the state on or before the due date
• § 7-1-67(A) NMSA 1978 — interest on tax not paid when due is mandatory ("shall"); no exceptions
• § 7-1-69(A) NMSA 1978 — 2% per month penalty (max 10%) for failure to pay due to negligence
• Regulation 3 NMAC 1.11.10 (formerly TA 69:3) — defines negligence as a failure to exercise ordinary business care and prudence

Case law cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" makes the interest assessment mandatory rather than discretionary

Source

• Listing: New Mexico Decisions & Orders
• Decision post: NMSU, Office of Business and Finance
• Decision PDF: D&O 98-14

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
NEW MEXICO STATE UNIVERSITY,
OFFICE OF BUSINESS AND FINANCE NO. 98-14
ID. NO. 01-507888-00 4, PROTEST TO
ASSESSMENT NO. 2092065

DECISION AND ORDER

This matter came on for formal hearing on March 11, 1998, before Gerald B. Richardson,

Hearing Officer. New Mexico State University, Office of Business and Finance, hereinafter,

“NMSU”, was represented by Jennifer Taylor, Assistant Vice President for Business and

Finance. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Mónica M. Ontiveros, Special Assistant Attorney General. Based upon the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. NMSU is a taxpayer which is required to make its payments of tax in accordance

with the special payment provisions of Section 7-1-13.1 NMSA 1978.

2. Taxpayers who are required to make payment in accordance with the provisions of

Section 7-1-13.1 are required to make payment by any of four listed methods, any of which will

meet the requirement that the tax payment funds will be immediately available to the state on or

before the due date for the tax payment. One of the authorized methods under Section 7-1-
13.1(B) is payment by automated clearinghouse transaction, hereinafter, “ACH payment”, to

allow deposit and fund availability to the state on or before the due date.

3. NMSU’s payment of taxes for the October, 1996 tax period was due on Monday,

November 25, 1996.

4. NMSU uses the ACH payment method to pay its taxes to the Department.

5. NMSU uses Sunwest Bank, now Nations Bank, as its bank. Sunwest Bank

provided NMSU a computer system so that NMSU can communicate directly with Sunwest Bank

for purposes of initiating ACH payments. Sunwest Bank then transmits the payment information

through the Federal Reserve system which makes the transfer of funds into the state’s bank

account. ACH payments take one business day to occur through the Federal Reserve system.

6. On Friday, November 22, 1996 at 3:03 P.M., NMSU initiated an ACH payment

transaction with Sunwest Bank to make a payment of $382,139.44 to the Department in payment

of its October, 1996 tax liability. At the time the transaction was made, NMSU’s computer

terminal indicated that the transmission had been made to Sunwest Bank. At the time the

transaction was made, Sunwest Bank’s computer system was functional and receiving

transactions.

7. NMSU and Sunwest Bank have a backup system in place to ensure that

transmissions actually occur as indicated on the system because, although rare, on occasion there

may be a problem in the transmission caused by such things as power surges, problems in the

telephone lines, etc. The backup system requires that transmitters follow their transmission up

with a fax to the bank requesting confirmation of the transmission.

8. On Monday, November 25, 1996 at 8:55 A.M., NMSU faxed its transmission

confirmation to Sunwest Bank.

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9. On Monday, November 25, 1996 at 8:38 P.M., Sunwest faxed a message to

NMSU informing NMSU that the transmission had not been received. NMSU and Sunwest

Bank do not know the reason for the failed transmission.

10. On Tuesday, November 26, 1996 at 9:32 A.M., NMSU re-transmitted its ACH

payment transmission to Sunwest Bank

11. On Tuesday, November 26, 1996 at 10:55 A.M., NMSU received a fax from

Sunwest Bank confirming that the transmission had been received.

12. The state received payment of NMSU’s October, 1996 tax payment on November

27, 1996.

13. As a result of the late payment of taxes by NMSU, on December 11, 1996, the

Department issued Assessment No. 2092065, assessing NMSU penalty in the amount of

$7,642.79 and interest in the amount of $4,776.74 for October, 1996 reporting period.

14. On February 24, 1997, NMSU filed a written request with the Department,

requesting a retroactive extension of time of additional 60 days beyond the normal 30 days

provided by statute, to file an administrative protest to Assessment No. 2092065. By the same

letter, NMSU protested the assessment.

15. On March 7, 1997, the Department granted NMSU’s request for a retroactive

extension of time, granting an additional 60 days for the filing of its protest.

DISCUSSION

The issues to be determined are whether NMSU is liable for penalty and interest on its

late payment of taxes. The assessment of interest will be addressed first.

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NMSU argues that interest should not be assessed because it feels it acted reasonably in

attempting to pay its taxes in a timely manner, it made a good faith effort to rectify the problem

as quickly as it became aware of it, and that as another state-supported institution, it makes little

sense to require the shifting of funds between two state institutions when considering the facts

and circumstances of this case.

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 not paid in a timely manner. Interest is imposed any time that

taxes are not paid when they are due, and for the period of time that they are unpaid. Because

Section 7-1-67 imposes what can be characterized as a strict liability standard anytime taxes are not

paid in a timely manner and because the tax payment was concededly late, the assessment of

interest must stand.

The Department argues that the imposition of penalty was proper in this case because
NMSU or its agent, Sunwest Bank was negligent in failing to make timely payment of tax in
accordance with the requirements of Section 7-1-13.1 and accordingly , penalty was properly

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imposed pursuant to Section 7-1-69. Specifically, Section 7-1-69(A)(1995 Repl. Pamp.) 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 a willful or fraudulent intent) for

failure to timely pay tax. 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.

NMSU argues that it was not negligent in the circumstances of this case because it

exercised ordinary business care and prudence which taxpayers would exercise in like

circumstances. Although I have some concerns about the prudence of waiting until the last possible

day to make payment of tax when there are numerous things which can go wrong with an ACH tax

payment, all of the previous administrative decisions where negligence was found involved some

sort of human error which caused the failure in the timely payment. In this case, the problem with

the payment was caused by some failure in the electronic transmission between NMSU and its

bank. Whether the problem was caused by a power surge, or some temporary problem with the

telephone lines, we will never know. What we do know is that both NMSU’s computer system and

the Bank’s computer system were functioning properly at the time of the transmission and that

when NMSU made the transmission, the message it got in its computer screen indicated that the

transaction had been made. Thus, to any reasonable person, it would appear that the transmission

had been successful. Given the unusual circumstances of this case in which we have the rare

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occurrence of a problem in the transmission lines by which the payment was effectuated, we have

no human error, and we have a system which gave all indications that it was functioning properly

and that the transaction had been effectuated, I believe that NMSU exercised that degree or ordinary

business care and prudence which was reasonable under the circumstances and that they were not

negligent for purposes of Section 7-1-69. Because NMSU was not negligent, the assessment of

penalty must fail.

CONCLUSIONS OF LAW

1. NMSU filed a timely, written protest to Assessment No. 2092065 and jurisdiction

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

2. Because NMSU’s payment of tax was not made on or before the due date in

accordance with Section 7-1-13.1 NMSA 1978, interest was properly assessed pursuant to Section

7-1-67 NMSA 1978.

3. Because NMSU was not negligent in failing to make timely payment of tax pursuant

to Section 7-1-69(A) NMSA 1978, the assessment of penalty is improper.

For the foregoing reasons, NMSU’s protest IS HEREBY GRANTED IN PART AND

DENIED IN PART. THE DEPARTMENT IS HEREBY ORDERED TO ABATE THE

PENALTY PORTION OF ASSESSMENT NO, 2092065.

DONE, this 18th day of March, 1998.

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