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Jamie C. Yesnowitz
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New Mexico Gov. Michelle Lujan Grisham signed into law an omnibus tax bill on April 4, 2019, adopting significant state-specific tax reform.1
The legislation implements mandatory combined reporting for corporate taxpayers, market-based sourcing for sales of services and intangibles, and a new economic nexus standard for the gross receipts tax. The legislation also contains a provision to allow publicly traded corporations a deduction for the financial reporting impact of the income tax changes.
For tax years beginning on or after Jan. 1, 2020, affiliated corporations that are part of a unitary group will be subject to mandatory unitary combined reporting. Combined reporting applies to corporations with more than 50% common ownership, where there is a common corporate parent.2
A unitary group is defined as two or more corporations that are commonly owned and economically interdependent, as evidenced by centralized management, functional integration and economies of scale.3
By default, the combined group includes all commonly owned unitary entities on a worldwide basis, though groups may make one of two elections to change the filing group.4
Groups may elect to either file on a water’s edge basis, excluding corporations which do not have more than 20% of their property and payroll within the United States, or file a consolidated return, including the same entities as the federal consolidated return group.5
The filing method elections must be made on the first original return filed by the affiliated group for tax years beginning on or after Jan. 1, 2020, and are binding for at least seven years, unless permission is granted by the New Mexico Department of Revenue to change the filing method.6
Prior period net operating losses (NOLs) will carry over into the combined group as grandfathered NOL carryovers. NOL carryovers will be adjusted for interest and royalty deductions taken for amounts payable to other corporations in the combined group. If a loss corporation which files a separate return after the effective date of the combined reporting mandate later becomes part of a combined group, use of its NOL carryovers will be limited under the federal separate return loss year (SRLY) rules.7
In determining the New Mexico NOL, the new 80% income limitation for purposes of the federal NOL applies.8
In addition to the filing methodology changes, the state also has adopted changes to the sourcing rules for sales of items other than tangible personal property, for tax years beginning on or after Jan. 1, 2020.
Under the market-based sourcing rules, sales of services will be sourced to New Mexico to the extent that the service is delivered in the state.9
Revenue from sales, rentals, leases or licenses of intangible property will be sourced to New Mexico to the extent that the property is used within the state.10
If the sourcing location cannot be determined, a reasonable approximation is required.11
If a reasonable approximation cannot be made, or if any revenue is sourced to a state where the taxpayer is not subject to tax, that amount will be excluded from both the numerator and denominator of the sales factor.12
The statute also provides that the Department may promulgate regulations to interpret the new sourcing provisions,13
so more detailed guidance may be forthcoming.
There has been no change to the historic three-factor apportionment formula applicable to most taxpayers.14
The single sales factor election available to qualifying manufacturers and headquarters operations remains in effect.15
ASC 740 deduction
For publicly traded corporations, the new statute contains a provision for a deduction for the financial reporting impact of the corporate income tax law changes.16
The deduction will be calculated as the aggregate increase in net deferred tax liabilities and/or decrease in net deferred tax assets in the first SEC reporting period impacted by these changes.17
The taxpayer must be able to show that the change in deferred tax accounts is directly related to the New Mexico law changes.18
Consistent with the experience in several states recently adopting combined reporting, claiming and documenting the ASC 740 deduction will be a process spanning many tax years. One tenth of the deduction may be claimed each year, from the tax year beginning on or after Jan. 1, 2026.19
A preliminary notice is required to be filed with the Department before Jan. 1, 2023, indicating that the corporation will claim the deduction, and including supporting information for the amount of the deduction.20
Gross receipts tax changes
Beginning July 1, 2019, New Mexico is adopting an economic nexus standard for gross receipts tax purposes. Companies with at least $100,000 of total taxable gross receipts sourced to New Mexico during the previous calendar year will have a gross receipts tax filing requirement.21
While limited exemptions are available, generally all business receipts are presumed to be subject to the gross receipts tax.22
The statute includes a provision stating that the Department may not retroactively apply this nexus standard and that physical presence is required to create nexus before July 1, 2019.23
The statute also specifies how marketplace transactions will be treated. A marketplace provider is defined as a person who facilitates a sale on behalf of a marketplace seller, by listing or advertising the sale by any means, and through direct or indirect agreements collecting payment from the customer and transmitting the payment to the seller (regardless of whether the provider receives consideration for these services).24
Marketplace providers are subject to the economic nexus rules and are required to collect and remit gross receipts tax on sales they facilitate. A marketplace seller acting through a marketplace provider also is required to file a gross receipts tax return, if the economic nexus threshold is met.25
However, a deduction is available for sales made through a marketplace provider, if the seller receives documentation from the marketplace provider that gross receipts tax has already been collected.26
The marketplace provider, and not the seller, is subject to audit for these transactions.27
The statute also requires that gross receipts be sourced to the location of delivery to the customer.28
Previously, gross receipts taxes were collected on an origin basis. The destination of a product or service will now determine the local jurisdiction tax rate applicable to a transaction. The Department is charged with developing a database to determine the local level tax rates applicable to a transaction sourced to a specific address.29
A taxpayer utilizing this database to determine the applicable tax rate will be protected from penalties and interest on audit.30
Authority to impose a compensating tax at the county and municipal level is established by this statute. Currently, a compensating tax exists only at the state level. An excise tax may be imposed on the use of property or services in a jurisdiction if gross receipts tax was not paid on the transaction, due to the seller not having nexus for gross receipts tax purposes.31
This tax is analogous to use taxes imposed by other states that impose sales taxes.
This statute brings to an end New Mexico’s unique corporate income tax filing system, which currently provides for separate combined, and consolidated reporting options. The new combined reporting mandate creates a system of reporting somewhat more consistent with other states. Taxpayers should analyze their combined filing position for New Mexico sooner rather than later, as any water’s edge or consolidated election must be made on the first return due after the effective date. The current statute does not provide for an opportunity for a unitary group to change its reporting method in future years.
Publicly traded corporations should take note of the lengthy process required to claim the deduction for the financial reporting impact of the corporate income tax changes. For most taxpayers, the impact of these changes will be recorded in their 2019 financial statements and SEC reporting. The initial documentation and calculation of the deduction is due to the state before 2023. The deduction itself will not be claimed on a return until 2026, over a 10-year period. The impact of the 2019 deduction will not be fully recovered until the filing of a return for the 2035 tax year in 2036, making this a potentially 17-year endeavor. Taxpayers intending to take advantage of this deduction should be sure to retain all documentation supporting this deduction for the full period.
New Mexico has joined the majority of states in adopting an economic nexus threshold in response to South Dakota v. Wayfair
The state has adopted a revenue-based threshold only, without including a provision that sellers with a specified number of transactions on an annual basis also have nexus in the state. The corresponding change to gross receipts sourcing, to a destination basis, may be challenging for small businesses to implement.
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