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October 26, 2012
New Mexico Penalty Dispute Increases Calls for Independent Tax Tribunal

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by John Buhl

The New Mexico Taxation and Revenue Department has struggled over the years to reassure taxpayers about the independence of its Administrative Hearing Office, which handles the initial appeal of many tax rulings.

New Mexico is one of several states whose hearing officers work within the revenue department, a practice that raises questions among private sector practitioners about whether they will receive a fair hearing.

Concerns over the administrative hearing process grew in September 2010, when the department assigned a contractor to oversee a case dealing with the penalties and interest imposed on unpaid taxes after its own hearing officers ruled against the department in multiple cases.

For several years, the Association of Commerce & Industry of New Mexico (ACI) has pushed for the creation of an independent hearing office.

Timothy Van Valen, a shareholder at Brownstein Hyatt Farber Schreck LLP, Albuquerque, told Tax Analysts that having hearing officers within the department creates a perception problem in the state's practitioner community.

"There's certainly a perception of it not being as level of a playing field," said Van Valen, an ACI member. "I think that perception is there and it won't go away."

Richard Anklam, president and executive director of the New Mexico Tax Research Institute, said the perception was worse when the hearing officers worked in the same office space as the department's litigators.

Anklam served as the department's assistant secretary for tax policy from 2003 to 2004. During that time, the department eventually relocated the hearing officers to another building, he said.

Taxpayers have the option of instead taking their case to a district court, Anklam said, but those challenges have a "pay-to-play" requirement forcing taxpayers to pay the assessment before moving forward with the legal challenge.

S.U. Mahesh, the tax department's communications director, sent an e-mail to Tax Analysts responding to concerns over the hearing officers' impartiality.

"The hearings bureau at the Taxation and Revenue Department operates independently," Mahesh said. "It's not uncommon for the hearings bureau to rule against the department."

Penalties and Interest Dispute

However, the department raised more questions about the process when it assigned a contractor to oversee a case dealing with the penalties and interest imposed on unpaid taxes.

Before 2008, for unpaid taxes assessed by the department, New Mexico had charged a 15 percent interest rate and a maximum penalty of 10 percent. In March 2007 the state enacted legislation (HB 436) that increased the maximum penalty to 20 percent and lowered the interest rate to the rate established by the IRS, which was 8 percent at the time. The law went into effect on January 1, 2008. (For HB 436, see Doc 2007-7008 or 2007 STT 56-14. For the department's announcement of the rate change, see Doc 2008-1258 or 2008 STT 20-21.)

Anklam said that the department did not implement a transition plan for handling unpaid taxes from periods before the new law went into effect.

Van Valen said that the department initially imposed the 15 percent interest rate and maximum 10 percent penalty for unpaid taxes from prior to January 1, 2008. But the department eventually began using the higher penalty along with the higher interest rate, he said.

Although the legislation may not have explicitly outlined how to handle unpaid taxes owed before January 1, 2008, but assessed after that date, subjecting those tax bills to the higher penalty and higher interest rate did not represent good tax policy, according to Anklam.

"The issue was grey, but the intention was not," Anklam said. "What's good policy was pretty obvious."

Several cases came before the hearing officers that included disputes over the higher penalty assessed by the department. The department's website lists 14 cases handled by the hearing officers from 2009 to 2011 in which the officer overruled the 20 percent penalty assessed by the department and ruled that a 10 percent maximum penalty was appropriate under the law.

Not long after hearing officers overturned the imposed penalty rate in five cases, the department hired Gerald Richardson to serve as a hearing officer on a contract basis. Richardson had previously worked as a full-time hearing officer for the department from 1979 to 2002.

Richardson was assigned to a case involving GEA Integrated Cooling Technology, in which he ruled in September 2010 that the department correctly imposed a maximum penalty of 20 percent.

Richardson told Tax Analysts that New Mexico law imposes the penalty based on when the assessment takes place, not the date in which the taxes were originally owed.

"This was a case where I thought that the previous decisions, which I did review, missed a key point," Richardson said.

GEA appealed the case to the New Mexico Court of Appeals. The court in its December 2011 ruling agreed with Richardson, overturning the penalty determinations in the other cases. (For the court's ruling, see Doc 2011-26144 or 2011 STT 240-17.)

Richardson said that he was brought in as a contractor to help with a backlog of cases. As a contractor, he said, he reported directly to then-Deputy Secretary Marilyn Wilson, not the chief hearing officer, Monica Ontiveros. When asked why, Richardson said it was perhaps to avoid any conflicts, since Ontiveros herself had issued a ruling in one of the earlier penalties and interest cases.

Richardson, though, argued that concerns about the current administrative hearing process within the department are overblown.

The department has no say over the hearing officer's decision, Richardson said. He also said that in his experience, taxpayers almost always used the hearing officer process because district court judges would not often have much of a background in complex state and local tax laws.

"They knew that I would understand those issues and had experience with them," Richardson said.

During his time as a hearing officer, Richardson said that department officials never tried to influence his rulings.

Independent Hearing Officers Legislation

For Anklam, though, the penalties and interest disputes solidified the need to have New Mexico's hearing officers in a separate department.

"Our current hearing officers aren't afraid to rule against the department, and they do," Anklam said. But he added that using a contractor after hearing officers ruled against the department circumvented the process and gave greater credence to the need for independent hearing officers.

Mahesh said that the department is discussing a legislative proposal that would put all of the state's hearing officers -- including those handling tax cases -- in a separate agency.

"The department is also exploring the potential possibility to create an independent hearings bureau through the legislative process that can handle all cases, not only involving [the Taxation and Revenue Department] but [also] other state agencies," Mahesh said.

Mahesh added that the department discontinued the use of hearing officer contractors when Gov. Susana Martinez (R) took office.

Van Valen said it is difficult to predict whether that proposal would receive legislative approval in 2013. However, he said that lawmakers have an increased awareness of the issue because it has been raised several times in recent years.

John Buhl

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