A self-employed musician honestly didn't know he owed gross receipts tax and got the penalty waived. Does the state still have to charge him interest on the unpaid tax?

Subject

Javier Padial (D&O 98-44)

Plain-English summary

In 1994, Javier Padial played in a band that regularly performed at the High Mesa Inn in Santa Fe. The band members worked as independent contractors, not hotel employees; the hotel paid each of them directly and issued Padial a Form 1099 at year end. Padial reported the income and paid state and federal income tax on it. What he didn't know — and what his tax advisor apparently didn't tell him — was that a self-employed person in New Mexico also owes gross receipts tax on business income.

After the IRS shared his 1994 income data in 1997, the Department found Padial wasn't registered and assessed $667.94 in gross receipts tax, $66.80 penalty, and $258.83 interest. Padial protested — but only the penalty and interest, not the underlying tax. At the hearing, the Department agreed he had not been negligent and abated the $66.80 penalty. That left just one question: does he still owe the interest?

Hearing Officer Margaret B. Alcock held that he does, and denied the protest on that point. Under Section 7-1-67, interest "shall be paid" on any tax not paid when due — the word "shall" makes it mandatory, not discretionary. Crucially, interest and penalty serve different purposes. A penalty punishes negligence, so it can be abated when the taxpayer acted in good faith (as the Department did here). Interest is not a punishment — it compensates the state for the time value of revenue it should have had, so the reason for the late payment simply doesn't matter. The Legislature provided no exceptions, so neither the Department nor the Hearing Officer had authority to waive the interest, however honest Padial's mistake. (The record showed roughly $587.94 tax and $370.58 interest still owed after crediting an $80 payment.)

What this means for you

• If you're self-employed in New Mexico, your business income is subject to gross receipts tax — on top of income tax. Getting a 1099 and paying income tax does not cover your gross receipts tax obligation. Register and report, or the tax will catch up with you when the state matches your federal return.
• An honest mistake can get your penalty waived — but not your interest. The negligence penalty can be abated when you acted in good faith. Interest cannot, because it isn't a penalty; it's the price of the state not having its money on time.
• The reason you paid late is irrelevant to interest. Bad advice from a preparer, not knowing the law, or an honest oversight won't reduce interest. It runs from the original due date until the tax is paid — even for taxpayers who get a formal extension to pay.
• Interest keeps growing until you pay. Because it accrues until the tax is satisfied, the longer an assessment sits unpaid, the more it costs. Here the interest eventually exceeded half the tax principal.
• Don't rely solely on your tax advisor for state tax questions. Padial's advisor never flagged gross receipts tax. In New Mexico's self-reporting system, the obligation to figure out your own tax duties ultimately rests with you.

Key questions answered

Why was the penalty removed but not the interest?
Because they do different jobs. A penalty punishes negligence, so the Department could abate it once it agreed Padial acted in good faith. Interest compensates the state for the time value of unpaid tax; it is not a punishment, so good faith doesn't excuse it.

Does it matter that Padial didn't know he owed the tax, or that his advisor misadvised him?
No. Section 7-1-67 makes interest mandatory regardless of the reason for late payment. An honest mistake or bad advice may support waiving a penalty, but it has no effect on interest.

Could the Hearing Officer have shown leniency on the interest?
No. The statute uses "shall" and provides no exceptions, so neither the Department nor the Hearing Officer has authority to abate interest. Their hands were tied.

Did Padial dispute owing the gross receipts tax itself?
No. He accepted that a self-employed person owes gross receipts tax and protested only the penalty and interest. The penalty was abated; the interest stood.

Verbatim citations

Interest is mandatory (Section 7-1-67(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....

The Hearing Officer on why interest is different from penalty:

The reason for a late payment of tax does not, however, affect the imposition of interest. Unlike the assessment of penalty, the assessment of interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid revenues. The legislature has directed the Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the mandate of the statute. Accordingly, the Department does not have authority to abate the assessment of interest against Mr. Padial.

The holding (Conclusion of Law 2):

Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against Mr. Padial for unpaid gross receipts tax due on income he earned during 1994.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Javier Padial
• Decision PDF: D&O 98-44

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 JAVIER PADIAL 98-44
ID. NO. 02-339524-00 9
ASSESSMENT NO. 2136436

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 14, 1998, before

Margaret B. Alcock, Hearing Officer. Javier Padial appeared on his own behalf. The Taxation

and Revenue Department ("Department") was represented by Javier Lopez, Special Assistant

Attorney General. Based on the evidence in the record and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1994, Mr. Padial was a member of a band that regularly performed at the

High Mesa Inn in Santa Fe.

2. The band members worked as independent contractors and were not employees of

the hotel.

3. The High Mesa Inn issued a separate check to each band member in payment of

services rendered. At the end of the year, the hotel issued Mr. Padial a Form 1099 showing the

amount of income he had earned during the year.

4. Mr. Padial reported and paid state and federal income tax on his 1994 income

from High Mesa Inn.

5. Mr. Padial was not aware that a self-employed person is liable for gross receipts

tax on his business income and was not given proper advice on this issue by his tax advisor.

6. In 1997, the Department received information from the Internal Revenue Service

concerning Mr. Padial's 1994 business income. When the Department investigated, it found that

Mr. Padial was not registered with the Department for payment of gross receipts tax.

7. On May 18, 1997, the Department issued Assessment No. 2136436 to Mr. Padial

for calendar year 1994 in the amount of $667.94 gross receipts tax, $66.80 penalty and $258.83

interest.

8. On June 10, 1997, Mr. Padial filed a written protest to the Department's

assessment of penalty and interest.

9. At the August 14, 1998 hearing, the Department stipulated that Mr. Padial was not

negligent in failing to report gross receipts tax on his 1994 income and agreed to abate the $66.80

of penalty assessed against Mr. Padial.

10. At the August 14, 1998 hearing, Mr. Padial produced receipts showing he has paid

$80.00 on the assessment. The record was left open to allow the Department to confirm that

these payments were properly applied and to update the interest currently due on the assessment.

11. Following the hearing, Debbie V. Martinez, Tax Accounts Auditor, submitted

information that there is a balance of $587.94 tax principal and $370.58 interest remaining on

Assessment No. 2136436. The interest figure is updated through August 25, 1998.

DISCUSSION

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The sole issue presented is whether Mr. Padial is liable for interest on his underpayment

of gross receipts tax on business income earned during calendar year 1994.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by

the Department is presumed to be correct, and it is the taxpayer's burden to overcome this

presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972).

Section 7-1-3(U) NMSA 1978 defines tax to include not only the amount of tax principal

imposed but also, unless the context otherwise requires, “the amount of any interest or civil

penalty relating thereto." Accordingly, the presumption of correctness of an assessment of tax

also applies to the assessment of interest. See also, El Centro Villa Nursing Center v. Taxation

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

Assessment of Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest

on late payments of tax and provides, in pertinent part:

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)

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory

rather than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). Even

taxpayers who contact the Department before tax is due and obtain a formal extension of time to

pay the tax are liable for interest from the original due date of the tax to the date payment is

made. Section 7-1-13(E) NMSA 1978.

Mr. Padial asks the Department to consider that his failure to pay gross receipts tax was

unintentional and that he made every effort to comply with pertinent tax laws. The Department has

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taken this into account by abating the $66.80 negligence penalty assessed against Mr. Padial. The

reason for a late payment of tax does not, however, affect the imposition of interest. Unlike the

assessment of penalty, the assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to

the mandate of the statute. Accordingly, the Department does not have authority to abate the

assessment of interest against Mr. Padial.

CONCLUSIONS OF LAW

1. Mr. Padial filed a timely written protest to Assessment No. 2136436 pursuant to

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

protest.

2. Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against Mr.

Padial for unpaid gross receipts tax due on income he earned during 1994.

For the foregoing reasons, Mr. Padial's protest IS DENIED.

Dated August 19, 1998.

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