Editor: Mary Van Leuven, J.D., LL.M.
On April 4, 2019, New Mexico Gov. Michelle Lujan Grisham signed House Bill (H.B.) 6, enacting major changes in the state's corporate income tax and gross receipts tax (GRT) regimes. The changes to the GRT came primarily in response to the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), in which the Court overturned its decades-old physical-presence nexus rule. This paved the way for states to enact economic nexus laws requiring out-of-state businesses to collect sales and use tax from in-state customers even if the businesses have no physical presence in the state. Under H.B. 6, New Mexico's own economic nexus threshold for the GRT took effect on July 1, 2019.
H.B. 6 also contained a second set of significant GRT changes that will go into effect on July 1, 2021. Potentially affecting more businesses than the nexus provisions, this second set of changes implements a regime of substantially uniform GRT and compensating taxes for both in-state and out-of-state businesses. Any sellers that transact business with New Mexico consumers should take note of these changes and understand the impact to their New Mexico tax obligations.
This discussion summarizes both sets of changes to New Mexico's GRT and compensating tax regime, including economic nexus for remote sellers and marketplace facilitators, a comprehensive system of local compensating taxes, changes in the state's sourcing rules, and expansion of the tax base to include services performed out of state and certain digital goods.
Basic structure of New Mexico's GRT and compensating tax
New Mexico's GRT is a unique state tax that resembles the retail sales tax (RST) imposed by most other states, but it differs from the RST in several ways. While an RST is a transaction tax imposed on the sale of tangible personal property and certain enumerated services, the GRT is imposed on the privilege of doing business in New Mexico. The tax base for the GRT is generally broader than an RST and applies to the sale of tangible personal property as well as generally to all receipts from services performed in New Mexico, the leasing or licensing of property in New Mexico, and the granting of a right to use a franchise employed in New Mexico.
Businesses subject to the GRT are not required to collect GRT from their customers, but in practice, they nearly always do. Similar to states with an RST, New Mexico also imposes a complementary compensating tax, which is an excise tax imposed on persons using property or services in New Mexico; as with a use tax, it is intended to protect New Mexico businesses from out-of-state businesses that are not subject to the GRT.
For in-state businesses, the GRT can be seen as easier to apply than an RST. Nearly all sales are subject to the GRT, meaning taxability determinations are likely less complicated than under an RST. In addition, the GRT rate is based on the seller's business location rather than the buyer's location. The rate includes a combination of state and local GRTs, if applicable. Because the GRT is currently origin-based rather than destination-based, many in-state sellers are subject to the GRT at only one rate that applies at their business location. As discussed below, H.B. 6 will require a shift in sourcing the GRT on July 1, 2021.
Economic nexus and marketplace providers
Prior to July 1, 2019, a business was subject to the GRT only if it had a physical presence in New Mexico. With the enactment of H.B. 6, however, a remote seller or a marketplace provider lacking a physical presence in New Mexico is now considered to be engaged in business in the state and will incur a GRT obligation if, during the previous calendar year, it had at least $100,000 in total taxable gross receipts from New Mexico consumers.
Under these new rules, a marketplace provider is responsible for GRT on its receipts derived from facilitating New Mexico sales, leases, and licenses, regardless of whether the marketplace seller is "engaged in business" in New Mexico.
To qualify as a marketplace provider, one must list or advertise items for sale, lease, or license and, directly or indirectly, collect and transmit the payment from the end customer to the marketplace seller. A marketplace seller is eligible for a GRT deduction if the provider pays the GRT, because the GRT obligation is imposed on the marketplace provider.
Following the trend of other states, H.B. 6 also imposes tax on specified digital goods sold to or accessed by in-state residents. As of July 1, 2019, New Mexico redefined the term "property" to include digital goods and defined the term "digital good" to mean a digital product delivered electronically, including software, music, photography, videos, reading material, applications, and ringtones.
Additional changes to the GRT regime will take effect July 1, 2021, when New Mexico moves to destination-based sourcing and a comprehensive system of local compensating taxes. This is discussed in more detail in the next two subsections.
Sourcing rule changes
Currently, New Mexico applies origin-based rules for sourcing GRT transactions, meaning that most sales of tangible personal property and services are sourced to the business location of the seller. Under these rules, a seller has an obligation to collect or pay state and local GRT if a delivery originates from a New Mexico jurisdiction in which the seller has a physical or business presence. For out-of-state sellers that satisfy the state's economic nexus threshold, a collection obligation applies for the statewide GRT (unless an exemption is available) but not for the GRT imposed by local jurisdictions.
Effective July 1, 2021, New Mexico will move to a destination-based sourcing regime for both sales of tangible personal property and certain services. Under the new regime, gross receipts (and deductions) from the sale or lease of tangible personal property, certain licenses, and most services will be sourced to the destination of the goods or services. In other words, items and services delivered to a customer will begin to be sourced to the location of the delivery rather than to the seller's business location.
There will be certain exceptions. In-person or "over-the-counter" retail sales will not be affected by this change. Sourcing for professional services will continue to be the seller's place of business. In addition, construction and real estate services will be sourced to the location of the construction project or real estate sold.
Both in-state and out-of-state sellers that make sales throughout the state will need to prepare to collect and report GRT at new rates based on the location of their customers. Pursuant to H.B. 6, the New Mexico Taxation and Revenue Department (TRD) must develop a database of tax rates to assist businesses and individuals in determining the correct rate of tax owed; sellers who rely on the database will not be held liable if the database somehow provides an incorrect rate.
Local compensating tax
In addition to the move to destination-based sourcing, New Mexico will also begin a comprehensive local compensating tax regime on July 1, 2021. Under the existing regime, there is no compensating tax in New Mexico on a municipal and county level — only a statewide compensating tax — even though local governments can levy a local GRT at varying rates.Deliveries from out of state are subject to a single state-level tax, while an in-state delivery is subject to the state tax plus any local GRT.
Pursuant to H.B. 6, the state will adopt a statewide system of municipal and county compensating taxes that will apply in each jurisdiction at a rate equal to the combined municipal and county GRTs imposed under current law. The new compensating taxes will apply to sales of tangible personal property, services, licenses, and franchises that are used in the municipality or county. The tax will also apply to tangible personal property, services, licenses, and franchises that are acquired inside or outside New Mexico as the result of a transaction with a person located outside New Mexico that would have been subject to the state GRT had the property, services, licenses, or franchises been acquired from a person with nexus with New Mexico.
Sourcing for the local compensating taxes will follow the new destination-based rules. The combination of the new sourcing rules and local compensating taxes means that most transactions that are subject to GRT or compensating taxes will be on a destination basis, and the tax will apply at the combined state and local rate in the destination jurisdiction, regardless of whether the seller was located in state or outside of New Mexico. The TRD will be charged with enforcing the collection of the local compensating taxes in the same manner as the statewide GRT and compensating tax.
The move to a local compensating tax regime will primarily affect persons that purchase goods, services, or licenses from out-of-state sellers. If an out-of-state seller does not collect GRT, perhaps because the seller does not satisfy New Mexico's economic nexus threshold, the New Mexico purchaser will be subject to an increased compensating tax obligation that is on par with the GRT that would have applied had the seller been located within New Mexico.
Tax changes for out-of-state sellers of services
Another upcoming change under H.B. 6 will primarily affect businesses that perform services outside of New Mexico for customers in New Mexico, because more services of this type will be subject to the GRT. Currently, New Mexico provides an exemption from GRT for certain "receipts from selling services performed outside New Mexico the product of which is initially used in New Mexico." Effective July 1, 2021, however, the exemption for services performed outside the state will no longer apply to most services. Instead, only "research and development services performed outside New Mexico the product of which is initially used in New Mexico" will be exempt (under certain circumstances). Moreover, the imposition of the compensating tax will be amended so that services performed outside the state are taxable if those services would have been subject to GRT if they were performed by a person with a GRT obligation. As a result, many out-of-state service providers selling to New Mexico customers will be required to collect GRT, and some in-state businesses may be required to accrue and remit compensating tax if GRT was not collected by the service provider.
There is one gray area for the sourcing of sales of services by out-of-state sellers that should be addressed by the TRD or the Legislature. As previously noted, some in-state professional services will continue to be sourced to the seller's place of business rather than the customer's location. But for out-of-state professional service providers, H.B. 6 is unclear on whether their services will be sourced on a destination basis or whether they will be subject to a single out-of-state rate. Based on draft regulations proposed by the TRD, it appears that out-of-state sellers of professional services, the product of which is delivered to a New Mexico customer for initial use in the state, will collect or pay only the state-level GRT.
Beyond the initial changes affecting economic nexus, marketplaces, and digital goods, H.B. 6 will soon bring additional substantial changes to the New Mexico GRT and compensating tax regime. To be ready for the changes taking effect on July 1, 2021, both New Mexico-based and out-of-state businesses should work to update their compliance processes and systems to ensure proper payment of New Mexico's GRT and compensating tax. These businesses need to ensure that their gross receipts are being appropriately sourced based on the new destination-based sourcing rules. Further, with the new local compensating taxes, businesses may also be required to remit compensating tax at an increased rate.
Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or email@example.com.
Contributors are members of or associated with KPMG LLP.
The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only. The information is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the author or authors only, and do not necessarily represent the views or professional advice of KPMG LLP.