On March 9, 2020, New Mexico Gov. Michelle Lujan Grisham signed legislation amending certain provisions of the New Mexico gross receipts tax.1 Effective July 1, 2021, the new law revises and expands recently enacted destination-based sourcing rules with respect to the gross receipts tax. The legislation also expands the gross receipts tax deduction for marketplace sellers to include both gross receipts tax and governmental gross receipts tax.
Expanded gross receipts tax sourcing rules
The legislation was enacted in part to clarify a series of tax bills that were passed during the previous legislative session.2 In particular, the law provides specific rules for the sourcing of gross receipts to accommodate the state’s transition to a destination-based sourcing regime in 2019. The rules specify that gross receipts are to be reported to the proper business location, depending on the type of property of service being sold.3 For sales of tangible property, the business location is determined by a hierarchy of sourcing rules.4 Sales of most services will now generally be sourced to the location where the product of the service is delivered.5 Sales of professional services performed in the state are sourced to the location of the performer or seller of the service.6 The new sourcing rules become effective July 1, 2021.7
The law conforms the compensating tax sourcing rules to those governing the gross receipts tax. Specifically, use of property or services subject to the compensating tax are reported to the business location where the gross receipts would have been required to be reported had the transaction been subject to gross receipts tax.8 In addition, compensating tax will be reported to the business location of the first use, if the purchaser can show that first use of the product or service occurs at a time and place different from the place of purchase.9 Finally, the legislation directs the New Mexico Department of Taxation and Revenue to designate specific location codes to identify business locations for a seller’s gross receipts, and maintain a database with corresponding tax rates for applicable business locations by address.10
Gross receipts deduction for marketplace sales
Currently, marketplace sellers are entitled to deduct receipts for sales, leases and licenses of tangible property or sales of services facilitated by a marketplace provider from their gross receipts tax base, provided that the marketplace seller obtains documentation indicating that the marketplace provider is registered with the Department and has remitted or will remit the tax due on the gross receipts from such transactions.11 Effective July 1, 2020, the legislation expands the gross receipts deduction to governmental gross receipts tax by adding the term “governmental gross receipts” to the deduction.12 The amendment was intended to preserve the general rule that all gross receipts tax deductions statutorily have parallel governmental gross receipts tax deductions.13
Other notable provisions
The legislation contains various other provisions, including the following:
- For gross receipts tax managed audits, taxpayers are allowed a credit against gross receipts tax of any compensating tax paid relating to the transaction. This credit is allowed even in the case where a refund of compensating tax cannot be filed because the three-year statute of limitations has run.14
- Municipalities and counties imposing a local option gross receipts tax are permitted to enact tax rates in increments of 0.01%, in order to simplify tax rate tables.15
- The corporate income tax apportionment rules are updated to provide that computer processing facilities and wind and solar farms producing wholesale electric power may apportion income using a single sales factor formula instead of the standard three-factor formula.16 Electricity generators qualify for single sales factor treatment through tax years beginning prior to Jan. 1, 2024.1
Commentary
The enacted legislation contains several significant changes to New Mexico’s gross receipts tax reporting location provisions to accommodate the state’s movement to destination-based sourcing in 2019. For example, the tangible personal property sourcing rules provide a cascade of location determinations to provide clearer guidelines for the transition to a destination sourcing principle. Specific sourcing guidelines are similarly provided for the sale of services, including a major change for the sourcing of non-enumerated services from the seller’s business location to the location where the service is delivered.
The new law also provides a technical correction to the marketplace seller gross receipts tax deduction for sales facilitated by marketplace providers. The deduction was intended to prevent double taxation given the often unclear boundary between a marketplace seller and marketplace provider.18 The addition of governmental gross receipts to the deduction clarifies that the deduction applies to all variations of the gross receipts tax, including compensating tax and governmental gross receipts tax.
1 H.B. 326, Laws 2020.
2 H.B. 6 (Ch. 270), Laws 2019; H.B. 479 (Ch. 274), Laws 2019. For further discussion of H.B. 6, see GT SALT Alert: New Mexico Enacts Omnibus Tax Bill, Adopting Mandatory Combined Reporting and Market-Based Sourcing.
3 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.
4 For example, property is sourced to the seller’s location if the property is actually received at the seller’s business location. If not received at the seller’s business location, the location is generally established by the buyer’s delivery address as per the buyer’s instructions. If these rules do not apply, the sale is sourced to the buyer’s address according to the seller’s business records. If none of the above apply, then the seller may use the address of the buyer obtained during the consummation of the sale, or the location from which the property was shipped or transmitted. H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.C.
5 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.F(5).
6 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.F(1). A “professional service” is defined as a service that requires either an advanced degree or a license from the state to perform. H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.K(4). Construction project services and services with respect to selling real estate are sourced to the location of the property site. H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.F(2), (3). “Construction-related services” are defined to include design, architecture, surveying, engineering, environmental and structural testing, security, sanitation and similar services. H.B. 326, § 4, amending N.M. STAT. ANN. § 7-9-3.4. Transportation services are sourced to the location where the person or property being transported enters the vehicle. H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.F(4).
7 H.B. 326, § 17.A.
8 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.G.
9 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.H.
10 H.B. 326, § 1, enacting N.M. STAT. ANN. § 7-1-14.I, .J.
11 N.M. STAT. ANN. § 7-9-117.
12 H.B. 326, § 6, amending N.M. STAT. ANN. § 7-9-117.
13 H.B. 326 Fiscal Impact Report, Feb. 18, 2020.
14 H.B. 326, § 2, amending N.M. STAT. ANN. § 7-1-29.
15 H.B. 326, § 11, amending N.M. STAT. ANN. § 7-19D-9; H.B. 326, § 12, amending N.M. STAT. ANN. § 7-20E-9.
16 H.B. 326, § 3, amending N.M. STAT. ANN. § 7-4-10.
17 H.B. 326, § 3, amending N.M. STAT. ANN. § 7-4-10.E(3).
18 H.B. 326 Fiscal Impact Report, Feb. 18, 2020.
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