Goodbye, New Mexico gross receipts tax. Hello, New Mexico sales and use tax.
New Mexico may start calling its gross receipts tax a sales tax. And if this seems like semantics, it’s because it is.
To understand why New Mexico would do this, and what the change would mean for businesses, it helps to understand what gross receipts tax is and how it’s similar to, and different from, sales tax.
What is a gross receipts tax?
A gross receipts tax (GRT) is a tax on a business’s gross sales (or gross receipts).
The majority of gross receipts taxes, such as Washington’s business and occupation (B&O) tax and Ohio’s commercial activity tax, are in lieu of a traditional corporate income tax. “These are different from a sales tax, or a tax that acts like a sales tax, that’s based on gross receipts instead of taxable sales,” explains Scott Peterson, VP of Government Relations at Avalara.
When a gross receipts tax is in lieu of an income tax, it typically has a low rate and a broad application.
But a gross receipts tax can also act more like a sales tax, and in that case, explains Peterson, it’s not characterized by low rates. South Dakota’s sales tax is imposed on gross receipts, and New Mexico’s gross receipts tax is much like a sales tax.
New Mexico gross receipts tax
Gross receipts tax in New Mexico applies to receipts from sales of property, services (including research and development services), and tangible personal property. New Mexico GRT also applies to the right to use a franchise in the state.
Unlike the gross receipts taxes that are in lieu of income taxes, which tend to be low, the base or state New Mexico GRT is 5%. Municipal and county gross receipts taxes are on top of that and can bring the total GRT rate to 9.3125% (as of this writing).
Local GRTs in New Mexico are subject to change twice annually, on January 1 and July 1. Changes to the state GRT are permitted no more than once a year and usually take effect July 1. The state GRT was lowered July 1, 2022, for the first time in 40 years. On July 1, 2023, the GRT rate will drop again, to 4.875%.
For the most part, New Mexico GRT rates are based on the location where the products were delivered or the services supplied. Some exceptions apply to the sourcing of professional services, which are services that require the provider to have an advanced degree from an accredited post-secondary educational institution or a license from the state to perform. So, for example, a lawyer based in Taos would be taxed at the rate in effect in Taos for services rendered to a client in neighboring Colorado.
How is gross receipts tax different from sales tax?
A true gross receipts tax is similar to a general sales tax in that both are based on the total amount of sales. However, while sales tax is a percentage of each transaction, gross receipts tax is a percentage of a business’s total revenue. If a GRT is acting like an income tax, it may apply to receipts that don’t come from sales.
The distinction is important.
For sales tax, businesses function as the tax collector: They collect sales tax from consumers then remit it to the state (and sometimes to the city, county, or special district as well). If a business isn’t required to collect, which is unusual today given the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., the consumer is liable for the tax and must remit it directly to the appropriate tax authority, usually in the form of a consumer use tax. Governments are always on the lookout for businesses that fail to collect as required.
Businesses are also liable for gross receipts taxes that function like a sales tax — though they typically can and do pass GRT onto consumers. And because the tax is on the business rather than the consumer, businesses are permitted to absorb New Mexico gross receipts tax (i.e., they can pay the tax themselves and not pass it on). Many states don’t allow retailers to absorb sales tax.
Another difference between sales tax and gross receipts tax is that sales tax is usually levied on specified transactions and applied at a higher rate than gross receipts taxes (or at least GRTs acting like an income tax). GRTs that are more like an income tax generally apply to a business’s total gross receipts regardless of where they come from.
Some gross receipt tax rates vary by the type of business, as is the case with the Washington B&O tax. Peterson says this is kind of like a sales tax with rates that vary based on the type of the product or service being sold.
Which states have a gross receipts tax?
Fewer than 10 states have a statewide gross receipts tax: Delaware, Nevada, New Mexico, Ohio, Oregon, Tennessee, Texas, Washington, and the District of Columbia. The GRT in some states functions like an income tax, while in others it’s more like a sales tax.
Most states whose gross receipts tax is similar to an income tax have a general sales and use tax as well:
- Nevada has sales/use tax and a commerce tax
- Ohio has sales/use tax and a commercial activity tax
- Tennessee has sales/use tax and a gross receipts tax
- Texas has sales/use tax and a franchise tax
- Washington has sales/use tax and a business and occupation (B&O) tax
- Washington, D.C., has sales/use tax and a GRT on certain industries
Delaware is an exception. It has no general sales/use tax and the Delaware gross receipts tax is a tax on the total gross revenues of a business, regardless of their source, at rates that vary by business activity.
New Mexico is another exception. The New Mexico gross receipts tax is their version of a sales tax, while the compensating tax is similar to the consumer use tax found in sales tax states.
Calling sales tax by another name is confusing for businesses
House Bill 323 wouldn’t change the structure of New Mexico’s gross receipts tax or how the tax is imposed or collected. It would simply change the name of the gross receipts tax, the compensating tax, and a number of related taxes.
Why? The main reason seems to be that calling it a gross receipts tax is confusing for businesses. It leads people to believe it’s like the Ohio commercial activity tax or the Washington B&O tax, when in fact, those two taxes are very different from the New Mexico gross receipts tax.
The bill’s fiscal analysis explains: “Many states have pure sales taxes; a few others have true gross receipts taxes that generally tax all activity at a very low rate. Our state’s GRT is a hybrid of the two and has been described as acting more as a broad-based sales tax on vendors of goods and services (the tax is applied to sellers rather than buyers). This is at odds with what, if anything, many businesses know about gross receipts taxes.”
Changing the name of the gross receipts tax to a sales tax would make the New Mexico tax structure “sound more familiar,” especially to small or foreign businesses. Yet as Scott Peterson notes, the fact that New Mexico isn’t exempting traditionally exempt entities will confuse people who think this would act like a real sales tax.
Sales tax may be easier for remote sellers to understand
The fiscal analysis doesn’t talk about remote sellers — businesses with no physical presence in the state — or the fact that remote sellers whose taxable gross receipts are at least $100,000 in the previous calendar year are required to register for New Mexico GRT under New Mexico’s economic nexus law.
Yet the analysis did say renaming the gross receipts tax could draw more businesses to the state because sales taxes are more familiar to many businesses.
“The gross receipts tax name does confuse, but it’s the tax’s breadth that really confuses,” says Peterson. “Like a traditional gross receipts tax, New Mexico’s tax applies to nearly every contract and thing. Because the tax is imposed on the business, the identity of the customer is irrelevant. If the activity is taxable, it’s taxable for all consumers, even traditionally exempt consumers like governments and nonprofits.”
Peterson draws a parallel with South Dakota to illustrate his point. “South Dakota sales tax is like the New Mexico gross receipts tax in that it’s imposed on the business, measured on gross receipts, and applies to nearly everything sold in the state; but it’s different in that businesses don’t collect South Dakota sales tax from nonprofits and government contracts.”
He notes that South Dakota’s contractors excise tax does function like New Mexico’s gross receipts tax: “It’s imposed on the business, applies to gross receipts, doesn’t exempt governments or nonprofits, and the tax itself is part of the base.”
In short, changing the name of the New Mexico gross receipts tax won’t eliminate all complexity for businesses. But perhaps it’s a step in the right direction.
New Mexico sales tax could take effect January 1, 2024
If the measure is enacted, New Mexico’s gross receipts tax would change to a sales tax effective January 1, 2024. Between now and then, tax officials would have a lot to do. The fiscal analysis concedes that there “will likely be unanticipated administrative problems implementing this name change” as well as “substantial costs to the Taxation and Revenue Department.”
As for the return on investment for these costs, “it is impossible to determine.”
This post was updated March 22, 2023, to reflect that New Mexico’s 2023 legislative session ended on March 18, 2023. HB 323 wasn’t enacted, so New Mexico won’t be renaming its gross receipts tax for now.
Visit the Avalara Tax Desk for more sales tax news.
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