Gross Receipts Tax in the Digital Age
In a previous article, we talked about New Mexico’s Gross Receipts Tax (or NM GRT). To summarize, New Mexico imposes a “sales tax” on the sale of services as well as goods. To briefly recap:
Gross receipts are the total amount of money or value of other consideration received from:
- Selling property in New Mexico;
- Leasing or licensing property employed in New Mexico;
- Granting a right to use a franchise employed in New Mexico;
- Performing services in New Mexico, and
- Selling research and development services performed outside New Mexico, the product of which is initially used in New Mexico.
This system was designed to tax most of the day-to-day transactions that take place within the State of New Mexico. When you buy a new shirt from your favorite retailer or when the repairperson comes to fix your refrigerator, there’s a good chance you’ll find a 7-ish percent surcharge for Gross Receipts Tax on your invoice or receipt. By and large, Gross Receipts Tax has been a reliable way for the state and our localities to raise revenue.
What about web sales and services?
Over the last few years, keeping up with Gross Receipts Tax has become far less simple. While there was never any question of whether the sale of goods by a local brick-and-mortar store resulted in Gross Receipts Tax, what about when that same store sells to out-of-state customers through its website? What about when out-of-state businesses sell to New Mexico customers through their websites? For a lot of reasons — some legal, some political, and some practical — the Gross Receipts Tax statutes never evolved to cover digital transactions.
The general rule is that an out-of-state company selling to New Mexico customers does not need to pay Gross Receipts Tax — and so does not need to pass that tax along to its customers — unless that out-of-state company has a physical presence in the State of New Mexico. By that same token, a company with a physical presence in the State of New Mexico does need to pay Gross Receipts Tax on its web sales to New Mexico customers — but not on web sales to out-of-state customers, as those are deductible.
UPDATE: When this article was first published, the preceding paragraph provided some quick and simple guiding lines for what revenue may be subject to Gross Receipts Tax and what revenue may not be. Since this article’s publication, the New Mexico legislature has, effective July 01, 2020, amended the Gross Receipts and Compensating Tax Act to eliminate NMSA Section 7-9-57.1 — the portion of the Act which allowed for the deduction of receipts from sales by New Mexico-based sellers to customers with addresses outside the State of New Mexico. Similarly, in the wake of the U.S. Supreme Court’s South Dakota v. Wayfair decision, the old rule of “physical nexus” being necessary for an out-of-state taxpayer to be subject to New Mexico’s Gross Receipts Tax became obsolete. Under the new rules promulgated by New Mexico (similar to rules promulgated by 40+ other states), a taxpayer can have no physical presence in New Mexico and still be subject to Gross Receipts Tax if its revenue from sales, leases, and licenses into the State of New Mexico was at least $100,000 in the previous calendar year.
Given that state sales, use, and gross receipts taxes are growing increasingly more complicated year after year, I highly recommend that you speak to a qualified tax attorney, accountant, or CPA to discuss your unique situation and the laws as they exist in the moment. By the time you read this article, the laws may have already changed again.
What about advertising revenue?
This is where things get really confusing. When your website has advertisements, you generally get a cut of the advertising revenue when someone views or clicks on that ad. Does that count as a sale? A service? And if it does, where does it take place — is there any connection to New Mexico? Is there enough of a connection for Gross Receipts Tax to apply?
Interestingly enough, our Taxation and Revenue Department sought to answer these questions before the digital era really kicked off. In 1996, they issued a Revenue Ruling analogizing the process of selling and placing third-party advertisements on your website to performing advertising services. If you’re doing this from New Mexico, you may be performing services in the State of New Mexico, your advertising revenue may count as gross receipts, and you may need to pay taxes on it — unless you’re selling advertisement space to out-of-state advertisement services (e.g., Google AdSense), in which case the advertising revenue is likely deductible.
What about… and… are those Gross Receipts?
It’s a question we get a lot, and it’s something we can certainly help with. Sometimes it’s easy to answer because it’s spelled out in the statutes or regulations. Sometimes it’s easy to answer because our Taxation and Revenue Department or the courts have decided it already. Other times, the answer might be more along the lines of “probably”, “probably not”, or “it depends”. If you’re not already doing this, we usually recommend that your business work with a legally certified accountant (CPA). Taxes are an ongoing matter and an ongoing relationship with a financial expert is the best way to make sure you’re keeping up with all of your tax obligations — not just Gross Receipts Tax. Here at Law 4 Small Business, we often say that a little law now can save a lot later. When it comes to taxes, the same is absolutely true of good accounting practices.
That said, accountants are often unwilling or unable to handle more complex legal questions. This is where a qualified tax attorney comes in handy. One of the things we do is look at the wording of the statutes and regulations, read through the opinions coming from the New Mexico Taxation and Revenue Department (NMTRD) and from New Mexico courts, and take a position that something should or should not be taxed. Even if the IRS or the NMTRD disagrees with our position, reliance on a position taken by a qualified tax attorney or CPA can often result in penalties being abated.