NEW MEXICO CHANGES
Effective for tax years beginning on or after January 1, 2021, New Mexico has changed its sourcing rule for sales other than sales of tangible personal property (i.e., services and intangibles) from cost-of-performance based sourcing to market-based sourcing under the revised Regulation Sections 3.4.10 NMAC, 3.5.18 NMAC, and related sections.
Similar to other states that have implemented market-based sourcing, New Mexico’s new rules result in sourcing various types of revenue to the state. For example, the following items would be considered “sales in New Mexico” for purposes of the corporate income tax sales factor:
- The sale, rental, lease, or license of real property located in New Mexico;
- The rental, lease, or license of tangible personal property located in New Mexico;
- The sale, rental, lease or license of intangible property, to the extent the intangible property is used New Mexico.
- A service delivered to a location in New Mexico.
The new regulations also include significant details related to the determination of when a service is “delivered to a location in New Mexico”. The regulations include cascading rules for determining the proper sourcing of services performed for New Mexico customers and allows the application of a “reasonable approximation” analysis depending on the taxpayer’s particular facts and circumstances.
Note also that, as of January 1, 2020, New Mexico changed its group reporting requirements to a worldwide reporting scheme for unitary businesses. The new 2021 regulations address this. Under the new regulations, similar to California, a “unitary business” is determined on general constitutional principles, citing the 1980 U.S. Supreme cases of Mobile Oil Corp. v. Comm’r of Taxes of Vt., 455 U.S. 425, 438 (1980), and MeadwestVaco Corp. v. Ill. Dept. of Revenue, 553 U.S. 16, 18 (2008). The most current regulatory revisions also include clarification of combined filing mechanics. For example, under the current revised regulations (Reg. Sec. 126.96.36.199 NMAC), the sales factor is calculated by excluding intercompany sales that would ordinarily be deferred or eliminated under federal consolidated filing rules when calculating net income for the group.
Effective January 18, 2021, Texas has adopted amendments to its rules on the sourcing of revenue for franchise tax purposes, with the most noteworthy amendments affecting the sourcing of gross receipts from services. According to the Texas Comptroller, the Texas revisions more closely conform Texas law with statutes from numerous other states by shaping the method taxpayers will be sourcing, apportioning, and calculating overall gross receipts.
Industries that have been affected include, among others, advertising, computer hardware, software, digital property, Internet hosting services, transportation services, securities, the sale of membership interests in limited liabilities companies, and certain types of loans and lending. Under this new guidance, the Texas Comptroller has provided a breakdown of the separate sourcing rules as applied to specific sources (i.e., types) of revenue. Taxpayers should also be aware that the effective date for individual provisions is not uniform, and the Texas Comptroller regards many of the changes as clarifying existing law or department policy. Some provisions are considered effective retroactively to franchise tax reports filed on or after 1/1/2008.
Please note that Texas is not strictly a “market based” sourcing state, or strictly a “cost of performance / place of performance” state. The nature of the service revenue determines the sourcing method. Determining what sourcing method properly applies to your client’s business may involve a more detailed analysis than in past years. The following chart summarizes the sourcing of various types of revenue that are affected by the new rules:
|Source of Income||Applicable Code Section||Applicable Sourcing Rule|
|Services (Generally)||34 TAC § 3.591(e)(26)||These are sourced where the receipt-producing, end-product act occurs and is performed (defined under the new rules as “the point at which all services culminate and transmute, into a final act from which benefits may be derived.”). The following examples were included:
· Concert hosting: sourced to the state where an audience observes the performance, with specific disregard for all other locations.
· Architectural design services: sourced to the location where the architect performed the architectural services.
|Advertising||34 TAC § 3.591(e)(1)||Sourced to the location of the advertising audience.|
|Capital Assets and Investments||34 TAC § 3.591(e)||“Net gains” from the sale of capital assets or investments are sourced depending on the type of capital asset or investment sold:
· Gains from intangibles are sourced to the location of payor.
· Gains from real property are sourced to the location of the property. Royalties from mineral interests are considered revenue from real property.
|Computer Hardware||34 TAC § 3.591(e)(3)||Computer Hardware (with any attending software) sales are sourced depending on exactly what is being sold:
· Sales of Computer Hardware (with any attending software) are sourced to Texas if delivered within or into the Texas.
· Leases of computer hardware (with any attending software) are generally sourced to the location of the property.
|Digital Property||34 TAC § 3.591(e)(4)||Sourcing of Digital Property depends on the medium through which it’s delivered and utilized:
· The sale of digital property through a fixed physical media is sourced to Texas if delivered within or into Texas (as tangible personal property).
· Leases of digital property through a fixed physical media are sourced to the location of the property leased.
· The sale or lease of digital property though any other media (i.e., electronic) is sourced to the location of payor as intangible property.
· Sales of digital property treated as a service (e.g., cable television subscriptions) are sourced using the default rules for performance of services, which are sourced to the location where the receipts producing, end-product act is performed (See Table under “Services (Generally)” above).
· Sales from the delivery of digital property as part of an internet hosting service are sourced as Internet hosting receipts (i.e., to the location of the customer).
|Financial Derivatives||34 TAC § 3.591(e)(10)||Receipts from contracts, hedges, options, swaps, futures, and forward contracts are sourced to the location of the payor.|
|Internet Hosting Services||34 TAC § 3.591(e)(13)||Receipts from these services are sourced based the customer’s physical location – where the purchaser consumed the internet hosting.|
|Loan Servicing||34 TAC § 3.591(e)(16)||If secured by real property, receipts are sourced to the location of the real property. If not secured by real property, they are sourced using the default rules for performance of services, which are sourced to the location where receipts producing, end-product act is performed (See Table under “Services (Generally)” above).|
|Loans and Securities (as Inventory)||34 TAC § 3.591(e)(17)||If the loans and security are generally treated as inventory, then the proceeds are sourced to the location of the payor.
If the loans and security are not treated as inventory (i.e., held for investment or risk management), then the rules vary depending on the type of capital/asset or investment:
· The net gain from the sale of an intangible asset (stocks, bonds, commodity contracts, futures contracts, patents, copyrights, licenses, trademarks, franchises, goodwill, and general receivable rights) is sourced to the location of the payor.
· The net gain from the sale of a derivatives are sourced to the location of the payor.
|(Sale of) Single Member LLC Interest||34 TAC § 3.591(e)(27)||Treated as an intangible asset and proceeds are sourced to the location of the payor.|
For more questions or information on this Tax Alert, please reach out to one of the following individuals:
Name: Peter Seidel, Director
Office: South San Francisco, CA
Email: [email protected]
Name: Tatyana Lirtsman, Senior Manager
Office: South San Francisco, CA
Email: [email protected]
Name: Javier Ramirez, Partner
Office: Irvine, CA
Email: [email protected]