New Mexico’s tax landscape encompasses a diverse array of levies, ranging from corporate income tax and gross receipts tax to a unique approach towards sales tax. The state’s corporate income tax rate is structured with careful consideration to income thresholds, providing businesses with a progressive tax framework. Additionally, New Mexico employs a gross receipts tax system, which distinguishes it from the traditional sales tax approach. This tax is applied to individuals engaged in business activities within the state, impacting consumers either as a separate item or integrated into the selling price.

Navigating New Mexico’s tax environment requires an understanding of the criteria for establishing tax nexus, both in terms of corporate income tax and gross receipts tax. The state offers various income tax credits to incentivize specific economic activities, contributing to its economic development initiatives. Furthermore, the intricacies of gross receipts tax, encompassing tangible personal property, services, and unique considerations for Software-as-a-Service (SaaS), add layers of complexity to compliance for businesses operating in New Mexico. In this overview, we delve into the nuances of New Mexico’s tax regulations, shedding light on key aspects that businesses and individuals need to consider for effective tax management within the state.

What is the New Mexico Corporate Income Tax Rate?

For net income not exceeding $500,000, the corporate tax rate in New Mexico is 4.8% of the net income. If the net income surpasses $500,000, the tax is calculated as $24,000 plus 5.9% of the amount exceeding $500,000.

Is There a Corporate Minimum Tax?

Yes, there is a $50 minimum Franchise Tax. Submission of the New Mexico form CIT-1, Corporate Income and Franchise Tax Return, is required for any corporations earning income from activities or sources in New Mexico. 

Even if a corporation is not actively conducting business in New Mexico or has no New Mexico Corporate Income Tax liability, if it possesses or exercises its corporate franchise in the state, it is subject to the Franchise Tax. Form CIT-1 must be utilized to report the annual $50 Franchise Tax.

When is the State Corporate Income Tax Return Due?

New Mexico corporate tax returns, filed using Form CIT-1, must be submitted by the 15th day of the fourth month following the conclusion of the fiscal year. For businesses operating on a calendar year basis, the deadline for filing falls on April 15.

How is State Income Tax Nexus Triggered?

New Mexico imposes corporate income tax on the net income of domestic and foreign corporations engaged in business transactions within the state or deriving income from property or employment within the state. The definition of “corporation” includes various entities such as joint stock companies, real estate trusts, financial corporations, banks, limited liability companies, or partnerships taxed as corporations under the U.S. Internal Revenue Code. “Net income” is generally the federal taxable income adjusted to exclude amounts not taxable by states. 

Exempt from both New Mexico Corporate Income Tax and Franchise Tax are insurance companies paying a premium tax to the state, trusts forming part of certain employee benefit plans, and nonprofit organizations like religious and educational entities that are exempt from income tax under the U.S. Internal Revenue Code, unless they have “unrelated business income” taxed under that Code.

For apportionment, an average percentage is computed based on the ratios of property, payroll, and sales factors related to business activity in New Mexico compared to the corporation’s overall business operations. In most cases, New Mexico employs the standard three-factor formula for businesses. However, special regulations apply to specific industries such as airlines, railroads, construction contractors, trucking companies, broadcasters, the financial sector, and the publishing industry.

Does Having an Employee or Contractor Trigger Nexus?

Yes, Any corporation that has employment in the state has nexus. An example stated by New Mexico of meeting the substantial presence test includes employees or representatives engaged in business activities within the state, establishing and sustaining the business’s economic market. The only exemption is if the business’s activities are protected under federal Public Law (P.L.) 86-272.

Are There New Mexico Income Tax Credits Available?

New Mexico offers various corporate income tax credits to eligible entities. These credits are designed to encourage specific activities or investments that benefit the state. Some examples of corporate income tax credits in New Mexico include:

High-Wage Jobs Tax Credit: 

This credit is aimed at businesses that create jobs with wages significantly higher than the statewide average.

Technology Jobs Tax Credit: 

Businesses involved in technology commercialization or technology-oriented manufacturing may be eligible for this credit.

High-Performance Media Production Tax Credit: 

Companies engaged in high-performance media production activities may qualify for this credit.

Investment Credit: 

Businesses making qualified investments in certain types of property and equipment may be eligible for an investment credit.

Alternative Energy Product Manufacturers Tax Credit: 

Companies involved in manufacturing alternative energy products may qualify for this credit.

Health Care Practitioner Tax Credit: 

This credit is designed to encourage health care practitioners to provide services in underserved areas of the state.

Rural Jobs Tax Credit: 

Businesses creating jobs in rural areas may be eligible for this credit.

Film Production Tax Credit: 

Companies involved in film or television production in the state may qualify for this credit.

What is the New Mexico Sales Tax Rate?

New Mexico utilizes a gross receipts tax system in lieu of a traditional sales tax. This tax is levied on individuals conducting business activities within the state. Typically, businesses pass on this tax to consumers, either as a separate item or integrated into the selling price. While resembling a sales tax in its impact on buyers, the gross receipts tax is distinct. The tax rate fluctuates across the state, ranging from 5.125% to 8.8675%, contingent on the business’s location.

How is Sales Tax Nexus Triggered in New Mexico?

Gross Receipt Tax (GRT) nexus in New Mexico can be established via physical or economic nexus principles.

Physical Nexus in New Mexico:

A person utilizing a product or service from research and development performed outside New Mexico may be subject to gross receipts tax if they establish physical nexus.

Physical Nexus for GRT:

• Maintaining a business location in New Mexico.
• Storing property in New Mexico.
• Employing individuals in New Mexico.
• Contracting with salespersons or agents in New Mexico.
• Leasing equipment used in New Mexico.
• Providing services in New Mexico.
• Licensing the use of intangible property in New Mexico.
• Transporting property in New Mexico using the taxpayer’s vehicles.

Economic Nexus for GRT:

As of July 1, 2019, individuals lacking physical presence in New Mexico can establish economic nexus, including marketplace providers. Engaging in business, for those without physical presence, means having total taxable gross receipts of at least one hundred thousand dollars ($100,000) from various transactions in the previous calendar year, sourced to the state according to Section 7-1-14 NMSA 1978.

What Transactions are Included or Excluded from NM Sales Tax?

In New Mexico, GRT is generally applicable to tangible personal property and certain services unless specifically exempted by law.

Taxable transactions include:

• Sales of most tangible personal property such as furniture, electronics, and home appliances.
• Certain digital properties like electronically downloaded music, movies, and books.
• Specific services such as telecommunications, landscaping, and repair services.
• Prepared food and beverages, including restaurant meals and fast food.
• Accommodations such as hotel stays and short-term rentals.

Exempt Transactions from New Mexico Sales Tax:

• Most types of clothing and footwear.
• Groceries and unprepared food items for human consumption.
• Prescription drugs and over-the-counter drugs sold pursuant to a doctor’s prescription.
• Periodicals like newspapers and magazines.
• Sales of medical devices, durable medical equipment, and prosthetic devices.
• Certain services such as professional medical services, educational services, and real estate transactions (but not the real estate agent’s fee).

Are Services Taxed for Sales Tax?

The vast majority of services are taxed for GRT in New Mexico, including services provided by an independent contractor for a business.

Is SaaS Taxable for Sales Tax?

Software-as-a-Service (SaaS) is taxable for GRT New Mexico, despite the state lacking a specific statute explicitly defining SaaS. However, both pre-packaged (canned) and customized software are deemed taxable, and professional services involved in software creation are also subject to taxation in the state. Consequently, Software-as-a-Service is subject to GRT in New Mexico. 

Careful consideration should also be given to the handling of user licenses in New Mexico, as the transfer of a license to the end-user may be deemed a sale of property. In such cases, the end-user could be liable for property tax in addition to the tax on tangible personal property.

Frequently Asked Questions (FAQs) – New Mexico Business Taxes

1. What is the corporate income tax rate in New Mexico?

In New Mexico, the corporate income tax rate is structured based on net income. For income not exceeding $500,000, the rate is 4.8%, while income exceeding $500,000 incurs a tax of $24,000 plus 5.9% of the amount exceeding $500,000.

2. Is there a minimum corporate tax requirement in New Mexico?

Yes, there is a $50 minimum Franchise Tax applicable to corporations. Even if a corporation is not actively conducting business in the state, possessing or exercising its corporate franchise in New Mexico subjects it to this annual Franchise Tax.

3. When is the deadline for filing the state corporate income tax return in New Mexico?

Corporate income tax returns (Form CIT-1) in New Mexico are due by the 15th day of the fourth month following the fiscal year’s end. For businesses operating on a calendar year basis, the deadline falls on April 15.

4. What triggers state income tax nexus in New Mexico?

State income tax nexus in New Mexico is triggered for corporations engaged in business transactions within the state or deriving income from property or employment within the state. Physical presence, such as having employees or property in New Mexico, establishes nexus.

5. Are there any income tax credits available for businesses in New Mexico?

Yes, New Mexico offers various corporate income tax credits to incentivize specific activities, including the High-Wage Jobs Tax Credit, Technology Jobs Tax Credit, Investment Credit, and others aimed at promoting economic growth and development.

6. How does the New Mexico gross receipts tax work?

New Mexico utilizes a gross receipts tax system, which is imposed on individuals engaged in business activities within the state. The GRT rate varies across the state, ranging from 5.125% to 8.8675%, depending on the location of the sale.

7. What transactions are included or excluded from gross receipts tax in New Mexico?

Gross receipts tax in New Mexico generally applies to tangible personal property and certain services unless specifically exempted by law. Taxable transactions include sales of tangible personal property, digital properties, specific services, prepared food, and accommodations. Exemptions cover items like clothing, groceries, prescription drugs, and certain services.