Santa Fe Baking Co.



On March 11, 2015, the Department issued the Taxpayer six assessments for withholding tax, penalty and interest.  On March 18, 2015, the Department issued an additional six assessments for gross receipts tax, penalty and interest.  On June 17, 2015, the Taxpayer filed a protest of the assessments.  The Taxpayer is a restaurant in Santa Fe, owned and operated by the same owner since 1998.  The Taxpayer agreed that it owes the assessed tax principal and interest, so the only issue to the addressed at the hearing was the assessed penalty.  During the period in question, the Taxpayer employed an office manager who was responsible for maintaining the financial records for the Taxpayer and for reporting and paying New Mexico combined reporting system (CRS) taxes.  The Taxpayer also engaged the services of a CPA, but this was only to prepare federal tax filings based on the books maintained by the office manager.  The office manager was not a CPA or otherwise trained in tax accounting methods.  The owner of the Taxpayer focused primarily on the kitchen and trusted the office manager and the CPA to take care of all the financial aspects of the business.  The owner realized there were problems when he learned of unpaid bills to vendors in the fall of 2014.  In October 2014, the Taxpayer hired another CPA to audit its financial records.  This CPA discovered that the Taxpayer had gone 33 months without reporting and paying gross receipts taxes, and he also found numerous errors and omissions related to accounting done by the office manager.  This CPA recommended to the owner in May 2015 that the office manager be relieved of her duties.  The office manager was relieved of her duties in September 2015.  The Taxpayer argues that it was non-negligent, and that paying the  assessed penalty would create economic hardship.  The Taxpayer’s arguments to establish non-negligence for purposes of penalty rely on three factors listed in Regulation NMAC.  The first is that the Taxpayer was affirmatively misled by a Department employee.  The Taxpayer argued that it was misled by the Department’s failure to detect the absence of filing and payments however, this does not equate to being misled by a Department employee.  Second, the Taxpayer argued that the office manager did such a poor job in maintaining the books, they were effectively physically damaged, which is another potential factor.  This argument is not relevant in this situation, as this applies when records are damaged by something like a flood or fire at the place of business.  Last, one factor that can help to establish non-negligence is reasonable reliance on advice of competent tax counsel or an accountant.  While the Taxpayer did employ a CPA to assist with federal tax filings, only the office manager, who was not a CPA or tax accountant, was responsible with maintaining the financial records and filing and paying the CRS taxes.  None of the arguments presented by the Taxpayer, including that of financial hardship, establish any reasonable grounds for abatement of penalty.  The Taxpayer’s protest was denied.