Last updated: April 2016
If you are selling goods or products online and some of your customers are located in New Mexico, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
A Note on New Mexico Tax Terminology
Instead of the more common term “sales tax,” New Mexico law uses the term “gross receipts tax.” In this article, “sales tax” and “gross receipts tax” are used interchangeably, even though gross receipts tax applies not just to sales but, in many cases, to services as well.
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means:
For basic guidance on how physical presence is defined specifically under New Mexico law, refer to Section 7-9-10 of the New Mexico Statutes (NMS). (The New Mexico Statutes are accessible online through a portal maintained by a private company.) Physical presence is also defined in Section 126.96.36.199 of the New Mexico Administrative Code (NMAC). (Part 3.2 of the New Mexico Administrative Code is available online.) The statute and regulation provide guidance on the term “activity,” which might otherwise be referred to as “engaging in business in New Mexico.” The regulation, in particular, refers to engaging in the specified activities (such “maintaining or utilizing” a place of business) directly or by an agent.
The state’s sales tax law states that activity “does not include having a world wide website as a third-party provider on a computer physically located in New Mexico but owned by another nonaffiliated person, and ‘activity’ does not include using a nonaffiliated third-party call center to accept and process telephone or electronic orders of tangible personal property or licenses primarily from non-New Mexico buyers, which orders are forwarded to a location outside New Mexico for filling, or to provide services primarily to non-New Mexico customers.” See NMS 7-9-3.3.
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state. The sales tax due is based on the state where the buyer is located. In New Mexico, there are over 200 different taxing jurisdictions, each with its own tax rate.
In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential nexus between a business and a state, including one type based on the Due Process Clause of the Constitution and another type based on the Commerce Clause of the Constitution. The type of nexus the Supreme Court ultimately found relevant for mail order businesses was the Commerce Clause version, which—as described by the Supreme Court—means physical presence.
In at least one of its online publications, the New Mexico Taxation and Revenue Department (TRD) discusses the requirement to charge gross receipts tax in terms of nexus rather than physical presence. However, the possible bases for gross receipts tax nexus as listed in the publication make it clear that, as in Quill, nexus is a matter of physical presence in the state.
Example 1: You are operating solely out of a warehouse in Philadelphia, Pennsylvania and make a sale to a customer in Santa Fe, New Mexico—a state where your business has no physical presence: You are not required to collect sales tax from the Santa Fe customer.
Example 2: You are operating solely out of an office in Roswell, New Mexico and make a sale to a customer in Las Cruces, New Mexico: You are required to collect sales tax from the Las Cruces customer.
Example 3: After several years of operating solely out of a warehouse in Philadelphia, Pennsylvania, you open a one-room satellite office just outside of Albuquerque, New Mexico—a state where previously you had no physical presence. A day later, you make a sale to a customer in Clovis, New Mexico: You are required to collect sales tax from the Clovis customer.
New Mexico’s GRT is calculated based on the seller’s specific location in the state of New Mexico. There are 233 different taxing jurisdictions in the state, each with its own tax rate.
New Mexico law considers tax on sales of items in terms of both exemptions and deductions. Under New Mexico law, some items sold via the Internet to New Mexico customers may be tax-exempt; in other cases, a taxed amount may be deductible. For a relatively brief and readable statement of the various exemptions and deductions, check the TRD FYI publication “GROSS RECEIPTS & COMPENSATING TAXES: AN OVERVIEW” (click here to download from the TRD website). For a more detailed review and explanation of all exemptions and deductions, including relevant statutes and illustrative examples, consult the sections in Part 3.2 of the New Mexico Administrative Code covering NMS 7-9-12 through 7-9-114.
New Mexico also has an annual gross receipts tax holiday from the first Friday in August through to the following Sunday. The tax holiday covers such things as clothing and shoes costing less than $100 and various computers costing no more than $1,000. For additional information, check the TRD’s tax holiday webpage.
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax. Typically, this customer-paid tax is known as a use tax;however, in New Mexico, it is known as compensating tax. (On its general FAQ page for taxes, the TRD answers the question “Does New Mexico have a use tax in addition to compensating tax?” with the statement “No, New Mexico’s compensating tax is our form of ‘use tax,’ a term used in most other states.”)
The TRD’s FYI publication “GROSS RECEIPTS & COMPENSATING TAXES: AN OVERVIEW” explains the compensating tax in more detail. Keeping in mind the Quill decision, note that one of the examples given in the Overview of where compensating tax is due is a mail-order purchase from an out-of-state company.
At the federal level, Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time New Mexico has not enacted any law that would require out-of-state retailers to collect sales tax from New Mexico customers. So in New Mexico, the physical presence rule applies for Internet retailers. However, because the issue is a subject of ongoing debate, you should consider checking in periodically with the New Mexico Taxation and Revenue Department to see if the rules have changed.