New Mexico Makes Major Changes to Its Tax System
A new package of tax updates will upend New Mexico’s gross receipts, corporate income tax, and personal income tax rules. House Bill 6 (HB 6) was signed by the governor on April 4, 2019, and it affects online sellers, nonprofit hospitals, motor vehicle sellers, and high income earners, among others.
Like other states that are passing similar laws now that South Dakota v Wayfair has been settled, HB 6 authorizes the state to start levying its gross receipts tax on online sales, even if the retailer (often called a remote seller) doesn’t have a physical presence in New Mexico. New Mexico’s economic nexus threshold to trigger the tax is $100,000 in gross receipts, regardless of the number of transactions made with in-state customers.
Some of the new gross receipts tax rules go into effect as early as July 1, 2019, while personal income tax increases won’t hit until 2021 — or will not go up at all if certain state revenue milestones are met in the coming years. Here are the key details.
Gross receipts tax
Effective July 1, 2019, HB6 requires remote sellers to start collecting and paying gross receipts tax on their New Mexico transactions in the following circumstances:
- Remote sellers with total taxable gross receipts of at least $100,000 from sales, leases, and licenses of tangible personal property sourced to New Mexico customers in the previous calendar year.
- Remote sellers with total taxable gross receipts of at least $100,000 with sales of licenses, and sales of services and licenses for use of real property sourced to New Mexico customers in the previous calendar year.
Both of these rules also apply to facilitators of third-party marketplace platforms like Amazon.
July 1, 2021: sourcing rules change from origin-based to destination-based
The law also changes the gross receipts tax sourcing rules from point of origin-based sourcing to destination-based sourcing for most categories of gross receipts. Under HB 6, gross receipts and deductions from the sale, lease, or license of tangible personal property, except for receipts from leasing a vehicle, will be reported at the location where the property is delivered to the customer.
For services other than professional services, gross receipts and deductions will be reported from the location where the service is performed. Professional services will continue to be reported from the seller’s place of business. In order to permit time for transitioning from origin to destination sourcing, city and county use tax is not imposed on remote sellers or marketplaces until July 1, 2021.
Compensating tax (also known as “use tax”)
The bill also makes changes to the compensating (use) tax to include a local option use tax consistent with the local option gross receipts tax. Because of the change in sourcing rules, the compensating tax rate is now the same as the gross receipts tax rate.
Previously, the compensating tax rate did not include a local option rate so this resulted in a rate that was lower than the gross receipts tax rate. In addition, compensating tax now applies to services purchased outside the state. Previously, compensating tax only applied to the purchase of tangible personal property purchased outside the state.
This new law also subjects nonprofit hospitals to the gross receipts tax, in a manner similar to for-profit hospitals. Previously, a hospital organized as a 501(c)3 organization was exempt from tax.
Personal income tax rate changes
Also under HB 6:
- Effective for taxable years beginning on or after January 1, 2019, the personal income tax deduction for capital gains will be reduced from 50 percent to 40 percent, and the working families’ tax credit will increase to 17 percent.
- A new top income tax rate will go into effect for tax years beginning on or after January 1, 2021, but only if state revenues grow by less than 5 percent between fiscal year 2019 and 2020; otherwise, income tax rates will not change.
- The new top income tax bracket would be 5.9 percent for married couples filing jointly earning at least $315,000, married individuals filing separately earning at least $157,500, and single individuals and estates and trusts earning at least $210,000, all of which currently have a top marginal rate of 4.9 percent on income over $24,000, $12,000, and $16,000, respectively.
Corporate income tax changes ahead
- Effective for taxable years beginning on or after January 1, 2020, New Mexico adopts worldwide unitary combined reporting as its default filing method for unitary groups of C corporations. Separate company reporting is eliminated as a possible filing method.
- Corporations choosing to stay with the default unitary combination method may make a “water’s edge” election to exclude, from the combined report, those unitary corporations (wherever organized or incorporated) that have less than 20 percent of their property, payroll, and sales within the United States.
- Corporations who are included in the same consolidated federal return may alternatively make a “consolidated group” filing election in New Mexico, where the composition of the New Mexico return would match the composition of the federal returns.
- Both the “water’s edge” election and the “consolidated group” election would be binding for at least seven consecutive years.
- Also effective for taxable years beginning on or after January 1, 2021, New Mexico adopts market-based sourcing rules for sales of services and intangibles, with a “reasonable approximation” standard and a throw-out rule.
Motor Vehicle Fees
The bill increases the motor vehicle excise fee from 3 percent to 3.5 percent.
How we can help
While there are numerous changes to New Mexico’s tax landscape, certain exemptions from the gross receipts tax are still allowed if the buyer issues the seller a nontaxable transaction certificate. However, each certificate requires a different form for each exemption.
CLA’s state and local tax professionals can help you review exemption opportunities and determine if your sales activity creates nexus for sales tax purposes. You can assess your compliance obligations under New Mexico’s new HB 6 rule with a post-Wayfair sales tax nexus assessment. We can also help you set up a tracking system to make it easier to capture and comply with HB 6-related transactions in the years ahead.