New Mexico increasing tax on services, changing sourcing rules

Some significant gross receipts tax changes will take effect in New Mexico on July 1, 2021. The Land of Enchantment is preparing for higher compensating taxes on sales of services and new sourcing rules.

To help protect businesses in the state from what the New Mexico Department of Taxation and Revenue calls “unfair competition from out-of-state businesses that are not subject to gross receipts tax,” New Mexico imposes a compensating tax (use tax) on persons using property and services in New Mexico.

Currently, the state rate is 5.125 percent for property and 5 percent for services, and there are no municipal or county compensating taxes. Effective July 1, 2021, the compensating tax rate for services will jump to 5.125 percent to match the rate for property. Additionally, applicable municipal compensating tax and county compensating tax will be imposed on the person using the property as of July 1, 2021.

Gross receipts tax and compensating tax will also apply to sales of services performed outside of New Mexico, provided the product of those services is initially used in New Mexico. However, certain research and development services performed outside the state are not subject to gross receipts tax, even if the product is initially used in New Mexico.

Gross receipts tax rates in New Mexico vary based on the location of the business. Presently, rates for both tangible personal property and services are based on the location of the seller (origin sourcing).

Starting July 1, 2021, gross receipts tax rates for property will be based on the point of delivery (destination sourcing).

However, sales of professional services will continue to be sourced to the seller’s place of business. Sourcing rules for construction and real estate services will continue to be based on the location of the affected property (i.e., the address of the construction project and the address of the property being sold or leased). More information about gross receipts tax is available from the Department of Taxation and Revenue, Gross Receipts Overview.

The change in sourcing rules will put New Mexico more in line with other states that require remote sellers and marketplace facilitators to collect and remit tax. In the meantime, remote sellers required to collect New Mexico gross receipts tax will collect only the state rate (5.125 percent). Once the new sourcing rules take effect on July 1, 2021, remote sellers will be required to collect city and county gross receipts tax in addition to the state rate, using destination sourcing to determine the rate.

Learn more about New Mexico’s collection requirements for remote sellers and marketplaces.

These and other changes are due to the enactment of House Bill 6. Anyone doing business in New Mexico is likely to feel the impact of this new law.

Learn more about gross receipts tax in New Mexico.