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New Mexico Gives Ground on Nexus for Gross Receipts (Sales) Tax Collection

The New Mexico Department of Taxation and Revenue has issued Revenue Ruling 401-10-1.

The ruling concerns the generally contentious issue of nexus.  The letter specifically addresses the case of a firm whose employees spend time in New Mexico installing and servicing their products. 

In a twist that seems in opposition to recent efforts of many states to push the limits of nexus, New Mexico concedes in this ruling that a company whose employees spend 2.5% of their total working hours in New Mexico does not have the sufficient nexus required to compel the company to submit gross receipts tax.

The hypothetical proposed in the letter does mention that the company's customer in NM was the US government, but the decision does not rely on that fact:

"The gross receipts tax is imposed on the gross receipts of any person engaging in business in New Mexico. "Engaging in business" is defined by Section 7-9-3.3 NMSA 1978 to mean "carrying on or causing to be carried on any activity with the purpose of direct or indirect benefit."  Brief and occasional visits to New Mexico by X's employees to attend briefings concerning the progress of activity under X's contracts with the United States do not establish a sufficient level of presence necessary to determine that X is engaging in business in New Mexico, since the cumulative amount of time spent in New Mexico by X's employees is less than two and one-half percent (2 1/2%) of the total level of effort required by any single contract. Therefore, X has not established sufficient nexus in New Mexico to provide jurisdiction to the state to apply the provisions of the Gross Receipts and Compensating Tax Act to X's receipts from contracts with the United States."  NM Ruling 401-10-1 (4/9/10).

Given the efforts in other states to push the limits of nexus, the decision in NM is stunning from a sales tax revenue collection standpoint.  (Although it makes pretty good sense from a common sense point of view...but this is sales tax law.)

The letter does go on to say that if the vendor contracts with a NM firm to do some marketing in NM, nexus will have been satisfied.  Interesting.  Read on.

The letter points out a few things:

First, the states have drastically different approaches when it comes to widening or trimming back their sales tax collection nets.

Second, the letter paints a pretty good picture of the counter-intuitive nature of the nexus debate.

Upon closer inspection, and a little editing, here is the nutshell: in NM, a vendor whose employees work an appreciable amount of time in NM delivering and installing (taxable services in NM btw) the vendor's product in NM is not subject to the state's gross receipts tax.

OK, but if the same company hires an independent contractor to provide marketing information on new opportunities in NM, an independent contractor who "will not make direct solicitations, no selling contracts signed, no commitments", nothing besides "information gathering and informal pre-proposal customer contact"... well that makes nexus for the vendor, of course!

So, if the vendor hires the independent contractor, all the vendor's sales in NM will be subject to gross receipts tax.

Its easy: when none of vendor's employees work in NM, the vendor has physical presence in NM.


Of course, when the vendor's employees actually work in NM, the vendor has no physical presence in NM.


The take away?  Nexus is an elastic legal concept that can be interpreted broadly in the sales tax compliance realm.   Vendors who operate in more than one state must carefully analyze the specific, current approaches taken by the jurisdictions that the vendors have contact with.

Vendors are presumed to understand and to comply with the different interpretations of their obligation to collect, report and remit sales taxes in various jurisdictions.

Makes perfect sense.

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