Are You Responsible for Gross Receipts Tax on Out-of-State Sales?
Gross Receipts Tax Online: Do You Pay Gross Receipts Tax on Online Sales?
Is your company located in the State of New Mexico? Is your company selling product online? Are you wondering when you’re supposed to collect gross receipts tax (GRT) for the sales? This is a common question so I thought it important to talk about it on our blog. In my experience, most businesses usually have a poor understanding of Gross Receipts Tax for out-of-state sales.
What is Gross Receipts Tax?
The New Mexico Gross Receipts and Compensating Tax Act is found in Chapter 7, Article 9, Sections 1 through 115 of New Mexico Statutes, and the overview of what types of transactions are subject to gross receipts tax can be found in Section 7-9-3.5, which begins with the following general statement in subsection (A)(1):
- “gross receipts” means the total amount of money or the value of other consideration received from selling property in New Mexico, from leasing or licensing property employed in New Mexico, from granting a right to use a franchise employed in New Mexico, from selling services performed outside New Mexico, the product of which is initially used in New Mexico, or from performing services in New Mexico. In an exchange in which the money or other consideration received does not represent the value of the property or service exchanged, “gross receipts” means the reasonable value of the property or service exchanged.
Possible Issues with the NM Gross Receipts Tax
From this general statement, the sales of services to an out-of-state buyer are subject to gross receipts tax if the product of those services is initially used in New Mexico. While this is a simple statement, a large legal community specializes in clarifying whether the product of services sold to an out-of-state buyer was “initially used in New Mexico”. The issue is most common in the case of a person or company in New Mexico that provides services or reports for an out-of-state company. An example would be a person residing in New Mexico who contracts with a company in Texas to produce reports. Say the consultant produces a report on the feasibility of doing business in New Mexico, and delivers it to the Texas company. Does the consultant have to report and pay gross receipts taxes on the income from that report?
To pay or not to pay- the answer is rarely clear
In order to answer that question, the relevant inquiry is whether the product of the report was “initially used in New Mexico”. The answer to that question may depend on the particular facts of the case. If, for example, if said report causes a previously stalled project in New Mexico to be restarted, then it’s quite clear the product was initially used in New Mexico. Thus gross receipts tax would be due from the consultant on payment received from the report. On the other hand, the report (product) caused the stoppage of a project in New Mexico, the answer would be less clear. In other words, it depends largely on circumstances.
Responses to the NM Gross Receipts Tax
The question most small businesses have is if they should question the tax or pay it. No small business wants to be audited. Unfortunately, no one answer fits all situations. However there are two options should be considered: to pay or not to pay. If you report the income and pay gross receipts tax on it but later discover the income was not subject to the tax, you may request a refund of the tax you paid, but without interest.If you choose not to report income as subject to gross receipts tax and are assessed the tax at a future date as a result of an audit by the New Mexico Taxation and Revenue Department, you will be subject to penalties and interest in addition to the base tax determined to be due.
This raises the issue of how to protect yourself from penalties if you are later determined to have made the wrong choice. We will address this issue in a future article.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later.