A school district paid its state taxes late because of computer problems and argued a penalty just takes money from classrooms. Does it still owe the penalty?

Subject

Los Alamos Public Schools (D&O 98-23)

Plain-English summary

Los Alamos Public Schools reports and pays gross receipts tax, compensating tax, and income-tax withholding to the state through the Combined Reporting System (CRS). Because its monthly payments are large, Section 7-1-13.1 requires it to remit using one of five approved methods that make the funds immediately available to the state by the due date; the district chose ACH (automated clearinghouse) payment.

Two 1996 slip-ups generated penalties:

• May 1996 — late payment. The $77,284.46 payment (due June 25, 1996) was not deposited in the state's account until July 19, 1996. The Department assessed $3,091.38 penalty and $966.06 interest (Assessment No. 2062638).
• June 1996 — late return. The payment itself was timely, but taxpayers paying electronically must also file a return explaining how the payment is to be applied, due the same day. The district did not file that return until August 9, 1996, drawing a $510.55 penalty (Assessment No. 2062637).

The district protested only the penalties. Its business manager explained that when he was hired in 1995 the district had an antiquated computer system and staffing problems; it installed new accounting software in July 1995, but software troubles continued. Hearing Officer Gerald B. Richardson denied the protest:

• Negligence penalty under Section 7-1-69. A 2%-per-month penalty (up to 10%) applies to a failure, due to negligence, to pay or file on time. Negligence (Reg 3 NMAC 1.11.10) includes "inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention," and the district bore the burden to overcome the presumption of correctness (Section 7-1-17(C); Tiffany Construction).
• Good-faith computer fixes were not enough. The lateness continued in many other months (Feb, Mar, Nov, Dec 1995; Jul, Aug 1996; Feb 1997) — long after the upgrade — showing an ongoing failure to fix the problem rather than a one-time glitch.
• No special rule for public entities. The argument that penalizing a school "takes money from classrooms" failed: the statutes and case law make no distinction between public and private taxpayers, so the penalty applies even-handedly.

What this means for you

• Electronic filers owe two things on the due date: the payment and the return. Paying on time is not enough if the return telling the Department how to apply the money is late. The district's timely June payment still drew a penalty because that return was late.
• A negligence penalty tests your conduct, not your intent. There was no fraud here — just recurring lateness. Because negligence includes carelessness and inattention, honest effort and good intentions do not, by themselves, defeat the penalty.
• Ongoing problems undercut a "we tried to fix it" defense. A software upgrade might excuse a single stumble, but months of continued late filings signaled the district had not done enough to solve the root cause.
• Public and government taxpayers get no discount. Schools, municipalities, and other public bodies are held to the same standard as private businesses. "The penalty hurts the public" is a policy argument for the legislature, not a legal defense.
• If large payments push you into mandatory electronic remittance, build in a margin. ACH and similar methods must post by the due date; a payment that clears days late is still late and penalized.

Key questions answered

Why was the district penalized for June when it paid on time?
Because electronic filers must also file a return explaining how the payment applies, due the same day as the payment. The district filed that return late, which is itself a penalizable failure under Section 7-1-69.

Didn't the new computer system excuse the lateness?
No. The Hearing Officer credited the effort but noted the late filings continued for many months after the 1995 upgrade. That ongoing pattern showed the problem was not fixed and pointed to negligence, not a single unavoidable error.

Is a public school treated more leniently?
No. The decision found no authority for a different standard for public entities. The statutes make no public/private distinction, and negligence by a public taxpayer is "no less culpable" than by a private one.

Was any tax actually disputed?
No. The district protested only the penalties for the May and June 1996 periods; the underlying taxes and the interest were not challenged.

Verbatim citations

The negligence-penalty statute (Section 7-1-69(A)):

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,....

Why good-faith efforts did not overcome the penalty:

While the Taxpayer's efforts to improve its computer and accounting system are laudable, the evidence demonstrated that the problems with its late reporting were ongoing, long after the new computer and software were installed.... the fact that they continued to occur does indicate some lack of action to rectify the ongoing problems.

No separate standard for public entities:

The statutes make no distinction based upon the public or private character of taxpayers, nor does the caselaw.... In the absence of any authority for the distinction the Taxpayer would draw, the law must be applied in an even handed manner, and negligence by a public taxpayer is no less culpable than negligence by a private taxpayer.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Los Alamos Public Schools
• Decision PDF: D&O 98-23

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
LOS ALAMOS PUBLIC SCHOOLS NO. 98-23
ID. NO. 01-503297-00 3, PROTEST TO
ASSESSMENT NOS. 2062637 & 2062638

DECISION AND ORDER

This matter came on for formal hearing on March 2, 1998 before Gerald B. Richardson,
Hearing Officer. The Los Alamos Public Schools, hereinafter, “Taxpayer” was represented by
Mr. Hugh Miller, Business Manager for the Schools. The Taxation and Revenue Department,
hereinafter, “Department”, was represented by Mónica M. Ontiveros, Special Assistant Attorney
General. Based upon the evidence and the arguments presented, IT IS DECIDED AND
ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Because of the size of its monthly tax payments under the Department’s Combined
   Reporting System (“CRS”), under which taxpayers report and pay gross receipts tax,
   compensating tax, and income withholding tax to the Department, the Taxpayer is required,
   pursuant to Section 7-1-13.1 to make its tax payments under any of five approved payment
   methods, all of which ensure that the funds are immediately available to the state on or before the
   due date for the tax payment.
2. The Taxpayer has elected to make its payments by automated clearinghouse
   transaction, (“ACH payment”).
3. The Taxpayer’s tax payment for the May, 1996 reporting period under the CRS
   system in the amount of $77,284.46 was due on June, 25, 1998.
4. The payment was made by ACH payment, and was deposited in the account of the
   state of New Mexico on July, 19, 1996.
5. As a result of the late payment of taxes for the May, 1996 reporting period, on August
   21, 1996, the Department issued Assessment No. 2062638, assessing $3,091.38 in penalty and
   $966.06 in interest for a total of $4,057.44.
6. Taxpayers who are subject to the special payment provisions of Section 7-1-13.1 and
   who make payment by ACH payment or other electronic means are required to file a return
   explaining how the tax payment is to be applied. The return is due on the same due date as the
   tax payment.
7. For the June, 1996 reporting payment, the Taxpayer submitted its tax payment of
   $25,527.65 by ACH payment and the payment was made in a timely manner. The Taxpayer
   failed to file a return, however, explaining how the tax payment was to be applied until August 9,
   1998, which was late.
8. As a result of the filing of a late return for the June, 1996 reporting period, on August
   21, 1996, the Department issued Assessment No. 2062637, assessing $510.55 in penalty.
9. On October 2, 1996, the Taxpayer requested that the Department grant a retroactive
   extension of time to file a protest to Assessment Nos. 2062637 and 2062638. The Taxpayer’s
   letter of October 2, 1996 also protested the two assessments.
10. On October 29, 1996 the Department granted the Taxpayer’s request for an extension
    of time to file a protest to the two assessments.
11. When Mr. Miller was hired as business manager in January of 1995, the Taxpayer had
    an antiquated computer system to handle its accounting. There were also problems with
    employee retention. As a result of these factors, the Taxpayer had a lot of financial accounting
    problems.
12. Mr. Miller attempted to rectify these problems. The Taxpayer got a new computer
    system with a new general accounting software package in July of 1995. Part of the software
    package was supposed to handle generating all of the figures needed for reporting New Mexico
    taxes.
13. Even though the Taxpayer had a new computer system and software, the Taxpayer
    continued to experience financial accounting problems, primarily due to operating problems with
    the computer software.

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14. In addition to the reporting periods of May and June, 1996, the Taxpayer was late in
    making payments or in filing returns, or both for the reporting periods of February, March,
    November and December of 1995; July and August of 1996 and February, 1997.
15. The Taxpayer’s late payment for the May, 1996 reporting period was due to the fact
    that the computer system did not give timely and accurate information in order to determine the
    amount of tax to be reported in a timely manner. No reason was given for the late filed return for
    June, 1996.

DISCUSSION

The sole matter being protested by the Taxpayer is the assessment of penalty for the
reporting periods of May and June, 1996. With respect to the matter in protest, Section 7-1-
17(C) NMSA 1978 provides that there is a presumption of correctness which attaches to any
assessment of tax by the Department. The presumption of correctness attaches to the assessment
of penalty as well as tax. Tiffany Construction Company 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). Thus, the
burden of proof is on the Taxpayer to overcome the presumption of correctness.
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,....

This statute imposes penalty based upon negligence (as opposed to a willful or fraudulent intent) for

failure to pay tax or file a return by the due date. 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:

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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 this case, the Taxpayer argued that it should not be considered negligent because it

made a good faith effort to comply with the statutory requirements for timely payment and

reporting of taxes. The Taxpayer cited to its efforts to rectify problems which occurred in the

past with respect to timely reporting and payment of taxes, especially the addition of new

computers and software which were supposed to generate accurate and timely information for tax

reporting purposes. The Taxpayer also argued that the imposition of penalty would serve no

public purpose since it would only operated to take resources out of the school classrooms.

With respect to the first argument, the Taxpayer has failed to overcome the presumption

of correctness. While the Taxpayer’s efforts to improve its computer and accounting system are

laudable, the evidence demonstrated that the problems with its late reporting were ongoing, long

after the new computer and software were installed. There was not enough evidence for this fact

finder to determine exactly why these problems occurred and continued to occur several times

more in 1996 and again in 1997 after the new systems were installed, but the fact that they

continued to occur does indicate some lack of action to rectify the ongoing problems.

As to the Taxpayer’s second argument, that as a public school district, the imposition of

penalty would serve no public purpose and would act to the detriment of the public because it

would remove resources from classrooms, I am not aware of any authority which would allow for

different rules to be imposed upon taxpayers who are public entities than for those who are not.

The statutes make no distinction based upon the public or private character of taxpayers, nor does

the caselaw. This would be a tax policy matter for the legislature to address, and apparently, it

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has not seen fit to do so. In the absence of any authority for the distinction the Taxpayer would

draw, the law must be applied in an even handed manner, and negligence by a public taxpayer is

no less culpable than negligence by a private taxpayer.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to Section 7-1-24 NMSA 1978

to Assessment Nos. 2062637 and 2062638 and jurisdiction lies over both the parties and the

subject matter of this protest.

2. The Taxpayer failed to present sufficient evidence to overcome the presumption of

correctness of the assessment of penalty for late payment or late reporting of taxes.

3. There is no exception or different standard for the imposition of penalty with respect

to taxpayers who are public entities as opposed to private entities.

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

DONE, this 22nd day of April, 1998.

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