Lynette Baldwin

11-08

The Taxpayer was a state-licensed jockey agent in tax years 2005 and 2006.  The Taxpayer believed that her income, a percentage of her jockey-client’s purse earnings, was exempt from gross receipts taxes because she was a “horsemen” for purposes of Section 7-9-40 NMSA 1978.  Because of this belief, the Taxpayer did not file any CRS reports or pay any gross receipts tax, but the income was reported to the IRS on a Schedule C.  As part of the tape match with the IRS, the Department found a difference between the Taxpayer’s Schedule C and CRS reported income for tax years 2005 and 2006.  The Department conducted a tape-match audit and assessed the taxpayer for gross receipts tax, penalty and interest for the two years in question.  The Taxpayer filed a written protest to the assessments, citing the exemption under Section 7-9-40 NMSA 1978 as her argument for not owing these taxes.  The auditor assigned to her protest contacted the Deputy Director of the New Mexico Racing Commission and determined exactly what a jockey agent does and that those services that do not qualify for the exemption cited by the Taxpayer.  The Taxpayer was informed of this but did not agree and renewed her protest to the assessments.  The hearing officer determined that it was clear that the Taxpayer did not qualify for the exemption given in Section 7-9-40 NMSA 1978.  Her income was subject to the gross receipts tax.  The taxpayer also argued against the imposition interest and stated that the interest was too high, but interest is mandatory in statute and not up to the discretion of the Department.  The rate is set in statute by the Legislature and must be imposed at the rate given.  Penalty is also correctly imposed in this situation because the Taxpayer’s erroneous belief that she did not owe tax qualifies as negligence.  However, the hearing officer determined that the penalty imposed exceeded the cap in place at the time the receipts were due, as the increase in the cap on penalty from 10% to 20% only happened in 2007.  Any penalty above the 10% was ordered to be abated.  For those reasons, the Taxpayer’s protest was granted in part and denied in part.  
Note: The New Mexico Court of Appeals has overruled the 10% penalty issue mentioned in this decision. (Case No. 30,932)