If the state's tax instructions don't spell out your exact situation, can you avoid the negligence penalty for not paying gross receipts tax on services you performed in New Mexico?

Subject

Kenneth G. Abbott d/b/a Abbott Designs (D&O 99-16)

Plain-English summary

In 1995, Kenneth Abbott — then a Texas resident — signed a contract to perform services for an Albuquerque company. The client wanted him on-site, so he and his wife moved to New Mexico and became residents in May 1995. His wife, who sold uniforms and clothing to restaurants, registered with the Department, received a CRS tax ID and a CRS-1 Filer's Kit of forms and instructions.

Mr. Abbott read the Filer's Kit but concluded it did not clearly establish that he owed gross receipts tax on his service receipts, so he never registered or filed for 1995. He did not call the Department, an accountant, or a tax attorney to confirm his belief. In 1998 the Department discovered the gap and issued Assessment No. 2277758 for $3,466.28 in tax, $346.62 penalty, and $1,473.17 interest (later reduced for some services performed outside New Mexico). Mr. Abbott protested only the penalty — not the tax or interest.

The Hearing Officer denied the penalty protest. Under Section 7-1-69(A), a penalty applies when tax goes unpaid due to negligence (short of fraud), and negligence is defined broadly in Regulation 3 NMAC 1.11.10 to include failing to use ordinary business care, inaction where action is required, and indifference or erroneous belief. Mr. Abbott's conduct hit all three:

• The Filer's Kit was not misleading. It says gross receipts tax applies to "persons" who perform services in New Mexico — not just residents — and it explains the out-of-state business rate (then 5.00%, location code 88-888) for those without a New Mexico business location. Nothing suggested the tax was limited to residents.
• At a minimum it should have prompted a question. The instructions gave a reasonably prudent person enough reason to investigate. Mr. Abbott could have called the Department or consulted a professional; instead he "chose to do nothing."
• The duty is on the taxpayer. New Mexico's self-reporting system (Section 7-1-13(B)) charges every person with the reasonable duty to determine the tax consequences of their actions (Tiffany Construction Co. v. Bureau of Revenue).

(The Hearing Officer also noted she had no jurisdiction over Mr. Abbott's complaint about the delay in notifying him, because he never protested the interest.)

What this means for you

• Gross receipts tax follows the work, not your residency. If you perform services in New Mexico, you can owe the tax even if you live out of state — there is even a specific out-of-state business rate and location code for people with no New Mexico business location.
• "The instructions didn't mention my exact situation" is not a defense. General language that the tax applies to "persons" performing services in the state is enough; you are expected to investigate further, not assume you're exempt.
• Silence from you is negligence, not safety. Not calling the Department and not consulting a professional is itself the failure of ordinary care that triggers the penalty.
• Protest the right pieces. Mr. Abbott protested only the penalty, so the Hearing Officer had no power to consider his interest complaint. If you think interest is unfair because of the state's delay, you must protest the interest.

Key questions answered

Did the out-of-state consultant owe New Mexico gross receipts tax?
Yes. The tax applies to persons who perform services in New Mexico regardless of where they live, and he performed the contracted services on-site in Albuquerque. He did not even dispute the tax — only the penalty.

Why wasn't the confusing Filer's Kit a valid excuse?
Because it wasn't misleading. It clearly states the tax reaches "persons" performing services in New Mexico and explains the out-of-state business rate. At most it should have prompted him to ask questions, which he never did.

What makes not filing "negligent" rather than an honest mistake?
Regulation 3 NMAC 1.11.10 defines negligence to include failing to use ordinary business care, inaction where action is required, and indifference or erroneous belief. Deciding he was exempt without checking with anyone met all three.

Why couldn't he get relief for the state's delay in notifying him?
Because that complaint went to the interest, and he never protested the interest — only the penalty. The Hearing Officer therefore had no jurisdiction to consider it.

Verbatim citations

The out-of-state business rule in the Filer's Kit:

If you have no business location or resident salesperson but are liable for gross receipts tax (for instance, because you lease property used in New Mexico or perform a non-construction service in New Mexico), you are liable for tax at the rate for out-of-state businesses which is the state gross receipts tax rate of 5.00%. Use the out-of-state business location code, 88-888.

The definition of negligence (Regulation 3 NMAC 1.11.10):

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.

Why doing nothing was negligent:

At a minimum, the instructions in the Filer's Kit provided sufficient information to cause a reasonably prudent person in Mr. Abbott's situation to investigate further.... Mr. Abbott chose to do nothing. This choice evidences both a failure to exercise the degree of ordinary business care and prudence which reasonable taxpayers would exercise under like circumstances and a failure to act where action was required.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kenneth G. Abbott d/b/a Abbott Designs
• Decision PDF: D&O 99-16

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
KENNETH G. ABBOTT d/b/a Abbott Designs 99-16
ID NO. 02-289380-00 6
ASSESSMENT NO. 2277758

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 15, 1999, before

Margaret B. Alcock, Hearing Officer. Kenneth G. Abbott appeared on his own behalf. The Taxation

and Revenue Department ("Department") was represented by Gail MacQuesten, Special Assistant

Attorney General. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1995, while a resident of Texas, Kenneth Abbott entered into a contract to perform

services for a company located in Albuquerque, New Mexico.

2. The buyer of Mr. Abbott's services wanted him on-site, and in May 1995, Mr. Abbott

and his wife moved to Albuquerque and became New Mexico residents.

3. Mr. Abbott's wife was engaged in the business of selling uniforms and other clothing

to restaurants.

4. After moving to New Mexico, Mrs. Abbott contacted the New Mexico Taxation and

Revenue Department to register for payment of gross receipts tax on her receipts from selling

tangible personal property in New Mexico.

5. The Department assigned Mrs. Abbott a combined reporting system ("CRS") tax

identification number to be used for reporting gross receipts, compensating and withholding taxes

and provided her with a CRS-1 Filer's Kit containing pertinent tax forms and instructions.

6. Mr. Abbott reviewed his wife's CRS-1 Filer's Kit, which explained that the gross

receipts tax is a tax on persons engaged in business in New Mexico and is imposed on the gross

receipts of persons who sell property in New Mexico, perform services in New Mexico, lease

property employed in New Mexico or sell research and development services performed outside

New Mexico when the product of the service is initially used in New Mexico. (Department Exhibit

A, "What is the Gross Receipts Tax?").

7. The Filer's Kit also contained a discussion of business location, including instructions

for persons who perform services in New Mexico but do not have a business location within the

state. (Department Exhibit B, Column 1, Para. 7).

8. Mr. Abbott did not believe this information was sufficient to establish his obligation

to report and pay gross receipts tax on his receipts from performing services in New Mexico and he

did not register with the Department or file any gross receipts tax returns during 1995.

9. Mr. Abbott did not check with the Department or consult with a tax attorney or

accountant to confirm his belief that he was not subject to gross receipts tax on his receipts from

performing services in New Mexico.

10. In 1998, the Department discovered Mr. Abbott's failure to report gross receipts tax

on his business income. On July 25, 1998, the Department issued Assessment No. 2277758 for tax

periods January-December 1995 in the amount of $3,466.28 tax principal, $346.62 penalty and

$1,473.17 interest.

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11. The Department subsequently abated a portion of the assessment based on evidence

that some of Mr. Abbott's receipts were for services performed outside New Mexico.

12. On July 29, 1998, Mr. Abbott filed a written protest to the penalty portion of the

assessment, stating that he was not protesting the taxes or interest.

DISCUSSION

The sole issue presented is whether Mr. Abbott is liable for penalty on his underpayment of

gross receipts tax on receipts from services performed in New Mexico during 1995.1

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 applies to the assessment of

penalty. 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 Penalty. Section 7-1-69 NMSA 1978 (1995 Repl.Pamp. and 1996 Supp.)

governs the imposition of penalty during the periods at issue in this protest. Subsection A 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....

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At the hearing, Mr. Abbott argued that the Department waited an unreasonable period of time before notifying him
of his gross receipts tax liability and should give him credit for a portion of the interest accrued during this period.
Mr. Abbott acknowledged that he never protested the assessment of interest. Accordingly, the hearing officer does
not have jurisdiction to consider this issue.

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The statute imposes penalty based on negligence, as opposed to fraud, for failure to timely pay tax.

There is no contention on the part of the Department that Mr. Abbott's failure to report and pay gross

receipts tax was the result of bad faith or fraud. What remains to be determined is whether he was

negligent in failing to report his taxes properly.

Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC

1.11.10 (formerly GR 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.

In this case, Mr. Abbott's failure to report gross receipts tax on receipts from performing services in

New Mexico meets all three definitions of negligence.

New Mexico has a self-reporting tax system. It is the obligation of taxpayers, who have the

most accurate and direct knowledge of their activities, to determine their tax liabilities and accurately

report those liabilities to the state. See, Section 7-1-13(B) NMSA 1978 (1995 Repl. Pamp.). There are

insufficient government resources to audit every taxpayer periodically to assure tax compliance. Every

person is therefore charged with the reasonable duty to ascertain the possible tax consequences of his

actions. 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).

Mr. Abbott attempts to shift this responsibility to the Department, arguing that the instructions

in the CRS-1 Filer's Kit were incomplete because they did not specifically address the situation where a

non-New Mexico resident enters into a contract to perform services for a New Mexico company. There

is no merit in this argument. The Filer's Kit clearly states that the gross receipts tax is imposed on

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"persons" engaged in business in New Mexico and applies to the receipts of "persons" who perform

services in New Mexico. Nothing in this language suggests that the tax is limited to New Mexico

residents. The section on business location confirms that persons who do not have a business

location in New Mexico may still be subject to tax, stating:

If you have no business location or resident salesperson but are liable for
gross receipts tax (for instance, because you lease property used in New
Mexico or perform a non-construction service in New Mexico), you are liable
for tax at the rate for out-of-state businesses which is the state gross receipts
tax rate of 5.00%. Use the out-of-state business location code, 88-888.
(emphasis added).

At a minimum, the instructions in the Filer's Kit provided sufficient information to cause a reasonably

prudent person in Mr. Abbott's situation to investigate further. Mr. Abbott could have called the

Department to determine whether services performed under contracts entered into by out-of-state

residents were subject to gross receipts tax. Alternatively, he could have consulted with an accountant

or a tax attorney. Mr. Abbott chose to do nothing. This choice evidences both a failure to exercise the

degree of ordinary business care and prudence which reasonable taxpayers would exercise under like

circumstances and a failure to act where action was required. It further evidences an indifference to the

legal obligation imposed on taxpayers to ascertain the possible tax consequences of their actions. The

negligence penalty was properly imposed under Section 7-1-69(A).

CONCLUSIONS OF LAW

1. Mr. Abbott filed a timely, written protest to the penalty portion of Assessment No.

2277758, and jurisdiction lies over the parties and the subject matter of this protest.

2. Mr. Abbott was negligent in failing to report gross receipts tax during the period

January-December 1995 and penalty was properly assessed pursuant to Section 7-1-69(A).

For the foregoing reasons, the taxpayer's protest IS DENIED.

DONE, this 18th day of March 1999.

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