New Mexico's Gone to Pot and More

Timothy R. Van Valen

Timothy R. Van Valen is a New Mexico attorney with more than 25 years of experience representing businesses with New Mexico tax concerns.

In this installment of Tax Issues in the Land of Enchantment, Van Valen reviews recent changes to New Mexico tax statutes in areas such as gross receipts tax deductions, medical and recreational marijuana, and COVID-19 pandemic legislation.

Copyright 2021 Timothy R. Van Valen.
All rights reserved.

I. 2021 Legislative Update

The New Mexico Legislature’s recently concluded 2021 regular and first special sessions resulted in numerous changes to the state’s tax statutes, most of which are summarized below. Among the more notable matters addressed are clarifications of innocent spouse relief for most state taxes, gross receipts tax deductions for healthcare professional and manufacturing equipment, as well as taxation of medical and recreational marijuana, and COVID-19 pandemic legislation for food and alcohol. Readers can most easily access 2021 legislation, until compiled, through the New Mexico Legislature’s website¹ under the heading “Legislation.”

Some provisions relating primarily to administrative and compliance issues, personal income tax for low-income taxpayers, timing, and clarifications of incentives not directly found in tax statutes are not included in this article.

II. Gross Receipts Tax

New Mexico’s transaction tax, the gross receipts tax, is, with limited exceptions, solely the obligation of a seller to report and pay. Sellers usually pass their tax liability on to buyers. The tax base is broad, imposed on receipts from selling property in, performing services inside and outside, leasing or licensing property used in, and granting the right to use a franchise in New Mexico.² The tax represents about 40 percent of state tax revenues and a large percentage of county and municipal tax revenues. There are, however, approximately 120 exemptions and deductions — considerably narrowing the tax base. The 2021 Legislature enacted several amendments to the Gross Receipts and Compensating Tax Act. With one exception noted below, all are effective July 1, the start of the state’s 2022 fiscal year.

A. Deductions, Alternative Evidence, and Nontaxable Transaction Certificates

For many years, sellers that wanted to claim some, but not all, gross receipts tax deductions had to have timely received the correct type of nontaxable transaction certificate (NTTC) — from approximately 20 different types — from the buyer, even if the seller qualified for the deduction in all other ways, no later than 60 days after initiation of an audit, often several years after a transaction. The result was the denial of many deductions solely because the seller did not timely get the correct NTTC, which often elevated form over substance. If a purchaser went out of business, the seller could not obtain an NTTC. If the seller or buyer changed its business entity or merged, the seller had to be sure it had an NTTC from the actual purchaser, not a predecessor or successor.

The 2018 Legislature amended N.M. Stat. Ann. section 7-9-43 to allow the use of “alternative evidence” to establish entitlement to a deduction in lieu of an NTTC. The individual deduction statutes, however, continued to state that an NTTC was required. Numerous sections of H.B. 98 (2021) added language to individual deduction statutes to eliminate ambiguity regarding when alternative evidence is an acceptable alternative to an NTTC. Because NTTCs continue to be conclusive evidence of seller entitlement to a deduction in most instances,³ they remain important because they present a more efficient path to establishing entitlement to the deduction than reliance on alternative evidence, over which there could be adequacy disputes.

B. Manufacturing Equipment Deduction

The gross receipts tax presents tax pyramiding problems for businesses because, without an exemption or deduction, the tax applies to all sales in a series of transactions leading to the end user or retail buyer. New Mexico has long had a gross receipts tax deduction for receipts from selling “ingredients or component parts” incorporated into a manufactured product.⁴ Unlike most states, however, New Mexico has lacked a deduction for receipts from selling or leasing manufacturing equipment to a manufacturer.

Indirect relief through the use of local government industrial revenue bonds allows large manufacturers to purchase manufacturing equipment and other tangible personal property as an agent of the governmental bond issuer, free from gross receipts tax on the seller. Since 1979 the investment credit has provided a credit against a buyer’s or manufacturer’s future gross receipts tax liability for large purchases of manufacturing equipment if the manufacturer also increased its number of employees in New Mexico.⁵ Because of the statutory requirements, these types of relief were generally unavailable to start-ups, smaller businesses, or businesses that reduced the number of their employees because of efficiencies created by equipment purchases.

Effective January 1, 2022, H.B. 278 levels the playing field for all manufacturers by amending N.M. Stat. Ann. section 7-9-46 to provide a gross receipts tax deduction for receipts from selling or leasing manufacturing equipment to a manufacturer, regardless of the size or number of new employees and without use of an industrial revenue bond. Under H.B. 278, a seller or lessor of manufacturing equipment may claim the deduction with a New Mexico NTTC executed by the manufacturer to the vendor or adequate alternative evidence. H.B. 278 also provides that a manufacturer or buyer that benefits from a seller taking the revised deduction may not also claim the investment credit.

C. Lease and License

Because of piecemeal amendments over time, the Gross Receipts and Compensating Tax Act has suffered from confusing and conflicting terminology. As noted above, the tax applies to receipts from leasing or licensing property used in New Mexico.⁶ The difference is material because receipts from leasing (and selling) real property are deductible,⁷ but receipts from licensing the right to use property are not. Because neither lease nor license has been defined in the Act, there have been disputes regarding whether receipts arise from a lease or license in a variety of contexts, including storage facilities, parking spaces, physical advertising space, and various types of temporary lodging.

Further confusing matters, the statutory definition of property includes licenses,⁸ and the gross receipts tax applies to receipts from selling property,⁹ which includes licenses. There has therefore been uncertainty as to whether there is a material difference between the statutory terms “selling a license [property]” or “licensing.”

S.B. 98, section 11, added definitions of “lease or leasing” and “licensing or license” based on New Mexico real property common law to resolve some of the ambiguity. The new sections clarify that lease or leasing “means an arrangement whereby, for consideration, the owner of property grants another person the exclusive right to possess and use the property for a definite term.” Licensing or license, however, “means an arrangement whereby, for consideration, the owner of property grants another person, the non-exclusive right to use the property.”

D. Healthcare Practitioners

New Mexico is one of only three states to comprehensively tax all services unless there is an applicable exemption or deduction. New Mexico has inconsistently administered statutes regarding whether healthcare practitioner practice groups may claim a deduction for receipts from selling healthcare services performed by individuals in the state.

N.M. Stat. Ann. section 7-9-93 (2004) provided a deduction for “receipts from payments by a managed health care provider or health care insurer for commercial contract services or Medicare part C services provided by a health care practitioner.” The statute was enacted to attract and retain more physicians to New Mexico, which was and is chronically underserved by a relatively small medical community.

In 2006 the Taxation and Revenue Department issued Regulation 3.2.241.13 NMAC stating that physician group practice entities, in addition to solo practitioners not associated with a legal entity such as an LLC, were entitled to the deduction, but not nonprofit organizations or “an HMO, hospital, hospice, nursing home, an entity that is solely an outpatient facility or intermediate care facility.” Later, the Department litigated and lost an administrative protest by an entity permitted to claim the deduction under regulation. The Department contended that the statute made it clear that only individual physicians not practicing in a business entity were entitled to the deduction.¹⁰ The Department did not appeal the decision to the New Mexico Court of Appeals.

In 2016 the Department obtained a statutory amendment to provide that the deduction was for listed “receipts of a health care practitioner” but did not repeal the regulation, which it must follow under the Tax Administration Act.¹¹ Following the 2016 amendment, however, the Department contended that the regulation that it had not repealed was nonetheless made void by the 2016 statutory amendment. The medical community resisted on the grounds that: (1) the regulation binds the Department under N.M. Stat. Ann. section 7-1-60; and (2) the regulation was a reasonable interpretation of the statute because it recognized that most physicians and other medical professionals do not practice as individuals, but as an LLC or corporation or as a member of a healthcare professional practice group. They questioned why the Department would contend that gross receipts taxation of physicians should be determined solely by their choice of a legal entity to practice under. There were similar issues for healthcare providers under two other gross receipts tax deductions for healthcare providers: N.M. Stat. Ann. sections 7-9-77 and 7-9-96.2.

The 2021 Legislature seemingly put these issues to rest, codifying the regulation as a statute, effective July 1.¹² The amended provisions state that an association of healthcare practitioners, a defined term for each statute with the exclusions also found in the Department regulation, may claim the deductions. It is possible, however, that the Department may argue that before the 2021 amendment effective date, only the few true solo practitioners in New Mexico not affiliated with any legal entity could claim the deduction because the 2021 amendment changed, rather than clarified, the law.

E. Delivered Groceries and COVID-19

Since 2004 New Mexico has provided a deduction for receipts from retail sales of groceries “at” a grocery store to reduce the regressivity of the gross receipts tax on low-income residents, though sales to any buyer qualify.¹³ When the COVID-19 pandemic led to increased grocery delivery to customers at home, the deduction arguably did not apply, and some grocers were passing gross receipts tax they paid on to customers because they did not believe that they could claim the deduction. S.B. 6, section 26, amended the statute to change “at” to “by” a retail food store, effective July 1. The Legislature did not make the change in the statute title, but titles are not legally binding under New Mexico law.¹⁴ The amendment did not change that third-party delivery services are subject to the gross receipts tax for delivery services performed in New Mexico, even though receipts from the underlying sale of groceries will be deductible.

F. Restaurants, Brewers, Distillers, and Wineries, and COVID-19

In response to pandemic-related closures and occupancy limits, S.B. 1, section 3, created a short-term gross receipts tax deduction for “food or beverage establishments”:

Qualifying “food or beverage establishments” are defined to be “a craft distiller; dispenser; mobile food service establishment; restaurant; small brewer; or winegrower.” Restaurant is defined to exclude “fast food restaurants” in favor of “sit down” restaurants, but disputes may arise regarding application of the term in some factual scenarios.

Because New Mexico sellers that are subject to the gross receipts tax usually pass the tax on to buyers, section 4 of S.B. 1 provides that:

The provision appears to be intended to address that most, if not all, cash registers in New Mexico automatically add gross receipts tax to taxable sales and that there would be expenses associated with reprogramming the registers for a short period. The unstated consequence is that a qualifying establishment can receive from a customer and keep the equivalent of state and local gross receipts taxes on sales free of gross receipts tax liability — typically around 7 to 9 percent of the sales price.

III. Rural Jobs Tax Credit

H.B. 98, section 9, amended and clarified the rural jobs tax credit. The credit may be claimed against state (but not local) gross receipts and compensating taxes and personal and corporate income taxes. The purpose of the credit is to stimulate economic development and job creation in rural New Mexico.

The 2021 amendments include:

• extending the credit to business expansion in addition to creation of a new business;

• expanding the information required to be submitted to qualify for the credit;

• requiring applications on a calendar year basis;

• requiring one application per calendar year; and

• defining, for the first time, a “new job” as a “job that is occupied by an employee who has not been employed in New Mexico by the eligible employer in the three years prior to the date of hire.”

The definition of new job is curious because it is tied to an individual employee, not a new position, which is commonly understood to be a job, and the term “job” itself is not defined. It appears that the credit would be based upon a business’s employee who is moved from a position outside New Mexico into the state, even if the position (“job”?) was preexisting. Changes affecting credit claims against gross receipts and compensating taxes take effect for jobs created in calendar quarters beginning on or after July 1. Changes affecting credit claims against personal or corporate income tax go into effect for jobs created in tax years beginning on or after January 1, 2022.

IV. Clarification of Oil and Gas Severance Tax Statutes

S.B. 98, sections 30, 31 and 32, clarified statutory definitions for the terms “product” and “volume” for the Oil and Gas Severance Tax Act, Oil and Gas Conservation Tax Act, and the Oil and Gas Ad Valorem Production Tax Act. The changes are effective July 1.

V. Insurance Premium Taxes

Effective July 1, S.B. 98, sections 34, 35, and 36, added provisions addressing taxation of self-insurance pools.

VI. Innocent Spouse Relief

Effective July 1, H.B. 98, section 3, amended and clarified the innocent spouse provisions in the New Mexico Tax Administration Act, N.M. Stat. Ann. section 7-1-17.1, applicable to most New Mexico taxes except the property tax. The amendment clarifies who is entitled to innocent spouse relief for tax liability created by the other spouse or former spouse. Because New Mexico is a community property state, relief may be granted to a current or former spouse for community tax debts created by the other spouse. The innocent spouse relief applies, as it does at the federal level, for income tax but also other taxes, including the gross receipts tax imposed on sellers.

VII. Recreational and Medical Marijuana

In 2007 New Mexico legalized sales of cannabis for medicinal purposes.¹⁵ During the recent 2021 special session, the Legislature passed, and the governor signed, legislation (H.B. 2) allowing adult recreational use of marijuana. Rather unusual for significant legislation, it does not provide an effective date, and therefore, by statute, the legislation goes into effect June 29, though the legislation states that the New Mexico Regulation and Licensing Department, which is tasked with administering regulation of sales, will determine when retail sales begin, but no later than April 1, 2022.

A. Cannabis Excise Tax

H.B. 2 enacted a cannabis excise tax to be imposed upon a cannabis retailer licensed by the Regulation and Licensing Department selling cannabis products in the state. The tax rate annually escalates from 12 percent of the “price paid” to the retailer through June 30, 2025, to 18 percent on July 1, 2030. The excise tax does not apply to retail sales of medical marijuana.¹⁶ The tax will be administered by the Taxation and Revenue Department under the New Mexico Tax Administration Act.¹⁷ Like the New Mexico gross receipts tax, the tax will be due by the 25th day of the month following a taxable sale.

To provide additional revenue to New Mexico local governments, one-third of cannabis excise tax revenue “attributable to a cannabis retailer in the municipality” will be distributed to the municipality, with a similar provision for another one-third going to a county for sales “attributable to a cannabis retailer” in the county outside a municipality.¹⁸ The statute provides no definition of what is necessary to establish attribution to a cannabis retailer in a county or municipality.

B. Gross Receipts Tax

The gross receipts tax is applicable to receipts from, among other things, “selling tangible personal property in New Mexico” unless there is an applicable exemption or deduction. Because there is no gross receipts tax deduction for receipts from retail sales of recreational marijuana, the receipts from retail sales will be subject to both state and local gross receipts taxes and the cannabis excise tax.

New statutory sourcing rules for the gross receipts tax taking effect July 1 will make out-of-state sellers subject to the gross receipts tax if they make more than $100,000 annually from sales to New Mexico customers.¹⁹

1. Agricultural Deductions

Regarding tax pyramiding, there is uncertainty as to whether receipts from the sale of unprocessed marijuana are exempt from the gross receipts tax for grower receipts from selling an “unprocessed agricultural product” under N.M. Stat. Ann. section 7-9-18. Department regulations define an “agricultural product” as “those products and the intermediate stages thereof which are normally raised or grown primarily for use as fiber or food for human or animal consumption.”²⁰ It is unclear whether the Department will consider marijuana an agricultural product for human consumption. There are deductions for receipts from selling seed, fertilizers, insecticides, and the like “to a person who states in writing that he is regularly engaged in the business of farming”²¹ and from “growing, cultivating or harvesting agricultural products” for which there may also be questions as to applicability.

Receipts from sales of unprocessed marijuana plant material to a processor may be deductible under N.M. Stat. Ann. section 7-9-46 as receipts from selling ingredients or component parts of a manufactured product. Manufacturing is defined by statute to be “combining or processing components or materials to increase their value for sale in the ordinary course of business.”²²

2. Medical Marijuana

Until H.B. 2, it has been unclear whether the gross receipts tax applies to receipts from sales of medicinal marijuana, retail or otherwise. Sellers have sought to claim a deduction for receipts from “selling prescription drugs” under N.M. Stat. Ann. section 7-9-73.2. Following an adverse administrative decision, the New Mexico Court of Appeals ruled in favor of a retail seller, holding that the deduction applies because marijuana is a controlled substance at the federal level.²³ The Department filed a petition for writ of certiorari to the New Mexico Supreme Court that is pending more than a year later. H.B. 2, however, contains an amendment, effective June 29, for receipts from selling medical marijuana.²⁴ It is unclear how enactment of the 2021 legislation may affect periods before its effective date under the prior version of N.M. Stat. Ann. section 7-9-73.2. H.B. 2 could be held to change the law not allowing a deduction or merely clarify prior law.

C. Personal and Corporate Income Tax

Sections 51 and 52 of H.B. 2 state that base income for New Mexico personal and state income tax, generally based on federal taxable income, does not include amounts that cannot be claimed as a federal deduction under IRC section 280(E) because they arose from “trafficking” federally “controlled substances,” which include marijuana.

VIII. Renewable Energy Production Tax Credit For Solar Generation

Effective July 1, the Legislature amended the provisions for the renewable energy production tax credit — N.M. Stat. Ann. section 7-2-18.18 (personal income tax) and N.M. Stat. Ann. section 7-2A-19 (corporate income tax) — to correct an apparent drafting error for solar projects. Previous language permitted the credit for up to “ten consecutive years” based on produced megawatt hours from the date of first commercial production, with a different stated amount of the credit for each “taxable year” up to 10 tax years. Initial production almost never starts on the first day of a tax year. The language therefore inadvertently suggested that if the 10th consecutive year (12-month period) ended after the 10th tax year, no credit was available for the remainder of the 10th 12-month period following initial production. H.B. 98, sections 6 and 7, amended the credit statutes to make it clear that the credit could be claimed for production for 120 consecutive months, even if some months fell in the 11th tax year.

IX. Liquor Sales

The Legislature enacted numerous changes to the state’s liquor laws. Included in those changes are the creation of deductions to personal income tax and corporate income tax for liquor license lessors, based upon the licensee’s sales.²⁵

The Legislature also created a gross receipts tax deduction for receipts from sales of alcoholic beverages:

1. Prior to January 1, 2026, a liquor license holder who held the license on June 30, 2021 may deduct from gross receipts the following receipts, for each dispenser’s license for which sales of alcoholic beverages for consumption off premises are less than fifty percent of total alcoholic beverage sales, up to fifty thousand dollars ($50,000) of receipts from the sale of alcoholic beverages for taxable years 2022 through 2025.²⁶

X. Conclusion

The Legislature’s regular and first special sessions of 2021 addressed fewer tax provisions than in past years. This was at least in part because of the COVID-19 pandemic’s effect on the Legislature and the physical closure of the capitol except to lawmakers and some staff. Except for the cannabis excise tax, most enacted tax legislation was intended to clarify existing law and reduce litigation over perceived gray areas. There was relatively little effort toward reform compared with prior years, though the new gross receipts tax deduction for receipts from selling or leasing manufacturing equipment to a manufacturer will make the deduction more equitable and reduce a long-standing source of tax pyramiding for manufacturers in New Mexico. Large scale tax reform in New Mexico has proven to be politically difficult, though there have been incremental advances in most years, largely directed at gross receipts tax pyramiding.