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New Mexico: Web-Based Services and Tools Are Taxable


 Yes! The gross receipt tax applies!

The Taxation and Revenue Department has issued three rulings this year regarding gross receipts and the Compensating Tax Act, and all three pertain to web-based tools and services. The overarching theme of these rulings is, "Yes, the New Mexico gross receipts tax applies."

The three rulings are:

  1. Sale of Subscription Access to Web-Based Tools
  2. Sale of Cloud-Based Services
  3. Sale of Access to Various Web-Based Services

Sale of Subscription Access to Web-Based Tools

In the first, business B and all of its employees are located in another state and provide "data used in strategic planning and impact assessment" to various institutions in New Mexico. Customers purchase a license to use the software programs and access "online software programs on a subscription basis."

Since B's New Mexico customers purchase licenses, and since "the business location is in New Mexico then the location of the license is also in New Mexico…." A license is a form of property in Mexico. "Thus, B is engaging in business in New Mexico," and the gross receipts tax applies.

However, B also performs consulting and analyst services outside of New Mexico. Receipts from sales of those services are exempt under Section 7-9-13.1.

 Sale of Cloud-Based Services

In the second ruling, business X provides a service it calls "Cloud Collaboration Service Offering," which is a "cloud-based hosting alternative to an absolute internal telecommunications infrastructure." X owns, operates and maintains all hardware and software, and customers access the hosted applications "through their own telecommunications, Internet or network connections" (paying the third party providers). Customers may also purchase additional services, such as having X "host customer-owned software applications…."

The department ruled that "any receipts X has from granting access to hardware and software by New Mexico customers is a license to use hardware and software." And receipts from sales of a license are subject to the gross receipts tax (Section 7-9-3.5 NMSA 1978). Period.

Sale of Access to Various Web-Based Services

The third ruling involves a business the ruling calls X but we'll call Y for clarity's sake. Y is an out-of-state business that "offers a variety of web services to customers, some of whom may be located in New Mexico." Customers "access Y's computing resources to perform a variety of activities (Service 1) and …store, retrieve, and maintain content, data applications, and software on servers (Service 2)." Both Y and its customers purchase their own telecommunications service.

The ruling notes that Y sells a license to customers which allows customers to access its services. Again, a license is considered a form of tangible personal property in New Mexico, and for "gross receipts tax purposes, the location of the license is the place where it will normally be exercised." The Department of Taxation clearly states: "Receipts from the sale of a license to customers in New Mexico are subject to gross receipts tax."

However, neither receipts "from providing storage capacity for data on a server located outside New Mexico" nor receipts from data transfer fees for uploading, downloading and moving data within the network" are subject to gross receipts tax in New Mexico."

Snapshot

In the above three rulings, businesses located outside of New Mexico are advised to pay the state's gross receipts tax on sales of licenses for web-based services to New Mexico customers.

How does your business handle sales tax in other states? Automation makes it a cinch.

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photo credit: 401(K) 2013 via photopin cc


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.