New Mexico Tax Developments

April 1, 2017



New Mexico continues to struggle with a substantial reduction in tax revenue coupled with the Governor’s pledge to not sign any legislation increasing tax rates or imposing new taxes.  This has led to a call from the Governor to reduce expenditures. Cost cutting measures include a state hiring freeze for all but law enforcement and social services; announcement of potential imminent state employee furloughs; and, substantial budget reductions for New Mexico state colleges and universities.

The revenue reductions are largely due to a reduction in oil drilling activity in New Mexico and a stagnant economy that has yet to recover from the “Great Recession.”  The cost of government services in New Mexico is exacerbated by the fact that New Mexico has two million people spread across the fifth largest state in the country.  Further, the state has a very high level of low income and unemployed residents, for which about 48% depend on Medicaid for health care. The state has effectively run through its once very substantial cash reserves that two years ago were on the order of 10% of the state budget.

Probably not coincidentally, the Taxation and Revenue Department continues to be extraordinarily unfriendly to taxpayers on multiple fronts, including tax audits and assessments, denial of refund claims and claims for tax incentives, sometimes on grounds that are nearly unintelligible.  Increasingly, the Department is also taking positions directly the opposite of positions it took in the past arguing that they made a multiple mistakes of law many years ago.  Many on the private side believe that the Taxation and Revenue Department’s approach is linked to the Governor’s desire to increase state tax revenue, without raising rates.  There is general agreement amongst practitioners that New Mexico tax administration is the most dysfunctional in years at multiple levels.

The 2017 New Mexico Legislature convened January 17 and adjourned March 18.  The last day for the Governor to veto, sign or pocket veto legislation was April 7.  The Governor’s administration presented no budget proposal for consideration other than her pledge that there would be no tax increases or new taxes.  As discussed further below, the Legislature passed a budget similar to the prior year (about $ 6.1 Billion) but included tax increases.  The Governor has promised to veto the budget, requiring a special session of the Legislature at an as yet undetermined date.  As of the date of this report (April 1, 2017), the Governor has not vetoed tax increases discussed below, but is expected to do so.  Generally issues the subject of a special session are ironed out in advance, but in 2016 there was a similar budget impasse requiring a special session with no advance work being done and no suggestion by the Governor’s Office, leaving the work, any resulting fallout, entirely to the Legislature.




1.         Passed: Slowed Down Phase-In of Corporate Income Tax Market Based Sourcing For Manufacturers.

If signed, House Bill 202 would slow down the previously enacted phase of single factor market-based sourcing for manufacturers by a year to 2019.

2.         Passed:  Slowed Down Reduction in Corporate Income Tax Rates

If signed, House Bill 202 would slow down the phased in reduction of corporate income tax rates, with the top marginal rate of 5.9% phasing in in 2019 rather than 2018.

3.         Passed:  Captive Real Estate Investment Trusts (“REIT”).

Senate Bill 391, passed unanimously by both houses, would amend the definition of “ net income” to add back any deduction for expenses claimed in calculating federal taxable income of a corporation for expenses and costs paid to a “captive real -estate trust” as defined for federal income tax purposes.

4.         Failed: Mandatory Unitary Combined Filing

A portion of Senate Bill 1 sought to impose mandatory unitary combined filing for corporate groups. Similar bills have been introduced for many years but have not advanced.

5.         Failed:  Removal of Foreign Source Dividends from Tax Base

Another portion of Senate Bill 1 would have expressly removed foreign source dividends from the New Mexico corporate income tax base, as has been done in nearly every other state. Foreign source dividends are dividends paid by overseas businesses arising out of non-U.S. operations to U.S. taxpayers.  Inclusion of foreign dividends is the subject of administrative litigation by several large international businesses with activities in New Mexico.

6.         Failed:  6.2% Rate Cap.

Senate Bill 389 proposed preplacing a pending phased-in reduction of the top marginal corporate income tax rate to 5.9% with a permanent cap of 6.2%.

7.         Market-Based Sourcing for Services and Intangible Property.

Senate Bill 274 proposed to change the state’s standard UDITPA method for determining when revenue from sales of intangible personal property and sales of services are apportioned to New Mexico.




New Mexico continues to see an increase in corporate income tax assessments on a wide variety of issues, including business/nonbusiness income, exclusion of foreign dividends, and the use of net operating losses by entities filing using the permitted combined or consolidated return methods.

D.        TRENDS/OUTLOOK FOR 2017/2018

It appears unlikely that there will be significant corporate income tax legislation in the 2018 New Mexico Legislature.  Even though the corporate income tax is generally only about 4-5% of New Mexico tax revenues (and less than that now), the precipitous drop in oil prices, and resultant contraction of tax revenues from exploration and production companies, as well as a variety of service companies, strongly suggests that the Legislature and the Executive Branch will be cautious about any decreases or new incentives, though increases also seem relatively unlikely due to the Governor’s position on “no new taxes.”  There will undoubtedly be a renewed effort with regard to mandatory combined filing for unitary corporations.  The 2018 session of the Legislature will be Governor Martinez’ last as she has termed out, leading to an uncertain crystal ball for that session or subsequent sessions.

There does not seem to be any let-up in the aggressiveness of the Taxation and Revenue Department, leading to continued considerable administrative and judicial litigation.



New Mexico’s transactional taxes are the “gross receipts tax,” similar in many ways to sales taxes in other states though with some material differences, and the compensating tax, a “use tax.”  The gross receipts tax is the largest single source of tax revenue for the state (about 45%), municipalities (about 80%) and counties (about 40%).


There was considerable action related to the gross receipts tax in the just completed 2017 session of the New Mexico Legislature.  It is not clear whether the Governor may veto any of the bills.

1.         Passed:  Municipal Environmental Services Gross Receipts Tax

House Bill 176 would expanded the scope of provisions of the Municipal Environmental Services Gross Receipts Tax. The bill passed both the House and the Senate unanimously.

2.         Passed:  Gross Receipts Taxation of Businesses without Physical Presence

This provision in House Bill 202 is directed at the controversial issue of taxation of internet sales and other remote sellers into New Mexico. The bill contains a de minimus exclusion for businesses with less than $100,000 in gross receipts (not gross receipts tax) in the prior calendar year. The bill has similarities with Senate Bill 264, which did not pass.

3.         Passed:  Non-Profit Gross Receipts Tax Deduction Repeal

Another provision of House Bill 202 would repeal the deduction in NMSA 1978, § 7-9-60 for receipts from selling tangible personal property to 501(C)(3) nonprofit corporations.

4.         Passed:  Hospital Gross Receipts and Governmental Gross Receipts Taxes.

House Bill 202 contains several provisions that would alter the gross receipts tax liability of hospitals.  Some of the activity was driven by the healthcare industry, largely not taxed at present, which wants the state to have sufficient funds to match with federal Medicaid funding, given that 48% of New Mexicans are on Medicaid.

A provision would include patient care receipts of governmental hospitals in the definition of “governmental gross receipts,” subject to the 5% governmental gross receipts tax. Other receipts would be exempt from the governmental gross receipts tax. However, an amendment to NMSA 1978, § 7-9-73.1 would provide for a phased-in 65% deduction for patient care receipts by July 1, 2018, for all such hospital receipts, after all other applicable deductions are taken.

Nonprofit hospitals would no longer be exempt from the gross receipts tax under NMSA 1978, § 7-9-29 as to receipts derived from patient care.  However, an amendment to NMSA 1978, § 7-9-73.1 would provide for a phased-in 65% deduction for all hospital patient care receipts by July 1, 2018, after all other applicable deductions are taken.

For-profit hospitals would also receive a phased-in 65% deduction for allreceipts, patient care or otherwise, up from the current 50%.

5.         Passed:  Healthcare Practitioner Receipts

House Bill 202 would amend NMSA 1978,  §7-9-73.1 to provide a deduction for receipts from a broader range of sources for listed healthcare practitioners for receipts for services within the scope of their practices, though for only 60% of the receipts. The deduction is currently limited to payments from Medicare Part C, managed healthcare providers, or insurance, excluding among other things patient direct payments.

6.         Failed:  Non-Profit National Laboratory Operator Receipts Not Exempt

House Bill 332 would have created an exception to the exemption for receipts of non-profit corporations for prime contractors operating Sandia National Laboratories or Los Alamos National Laboratory. While the labs are owned by the United States, they are operated and managed by private businesses. The bill responds to concerns that if the national laboratories were to become operated by nonprofits (as Los Alamos was until 2006) there could be a substantial reduction in gross receipts tax revenue. There is a new for-profit operator of Sandia National Labs (a subsidiary of Honeywell International) so for the foreseeable future there is no issue there.  Los Alamos National Lab is probably up for a management change and the issue remains live for it and the community of Los Alamos.

7.         Failed:  Exemption for Guaranteed Payments to Partners

Senate Bill 100 would have clarified that, similar to employee wages, guaranteed payments received by partners would be exempt from the gross receipts tax. This issue was thought to have been administratively resolved several years ago but has cropped up again in Taxation and Revenue Department audits.  Look for this issue to reappear in 2018.

8.         Failed: Major Overhaul of the Gross Receipts Tax

House Bill 412 would have revised several New Mexico taxes in an effort at simplification and greater tax equity.

The most significant component of House Bill 412 was an effort to take the gross receipts tax back to its roots, with a broader tax base and resulting lower rate.  House Bill 412 is the most significant and thoughtful effort at gross receipts tax reform in many years.  The bill was introduced nearly half way through the 60-day 2017 Session and passed the House unanimously, but stalled in the Senate as the session wound down.

The bill’s contents require careful study and fiscal impact analysis to determine whether it is fiscally sound or may need additional work to achieve its goals.  Full and credible analysis is essential because the gross receipts tax is the single largest source of tax revenue in New Mexico.  Look for a variant of House Bill 412 in future sessions or the anticipated special session.

9.         Failed:  Taxpayer Specific Information to Counties and Municipalities.

House Bill 457 would have allowed local governments to receive taxpayer specific information about gross receipts tax payors within their jurisdiction. This bill is part an ongoing effort by local governments to ensure that the Taxation and             Revenue Department is distributing and transferring the correct amount of local taxes to the taxing entities. At present, the process is opaque and local governments generally do not know why revenues go up or down from month to month, sometimes in very significant amounts. On the other side of the issue is taxpayer confidentiality and the integrity of New Mexico’s voluntary compliance tax system.




1.         Aggressive Audits Triggered by Review of Personal and Corporate Income Tax Returns

The Taxation Revenue Department continues an aggressive gross receipts tax audit program against companies that remit to New Mexico substantial amounts of payroll withholding tax or income tax but not significant amounts of gross receipts tax.  Businesses subject to such audits are often payroll processing companies, temporary employment agencies, employee leasing companies and other staffing related businesses for whom workers are for tax administration purposes employees of the audit target, but who work for the audit target’s customers.

Employee wages and salaries are exempt from the gross receipts tax.  The Department, however, contends that the staffing business audit targets owe gross receipts tax on the entire amount of payroll and related payments processed for their customers under the contention that “employees” performing services on behalf of the payroll company, rather than its customer.   The Department is rejecting taxpayer arguments that the payroll related amounts are not gross receipts subject to tax because they are received solely as an agent for their customers. The perverse result is that it reduces the attractiveness of outsourcing payroll and HR functions.  This is an issue that has flared up repeatedly over the last 15 years or so.

Finally, in some instances, the Department is auditing not only a local staffing franchisee of a national staffing company, but also the franchisor.  It is likely that several local businesses will be forced to close their doors if the Department prevails in its audits of the local businesses.

2.         Widespread Denial of Tax Credits and Refusal to Act on Refund Claims

In the last three to four years, the Taxation and Revenue Department has generated an unprecedented number of taxpayer administrative protests by: 1) taking very aggressive positions on tax incentives; and, 2) denying or refusing to act on refund claims within the statutory 210 days.  The consequence is that Department lawyers are overwhelmed defending protests and the Hearings Bureau is more behind than it has ever been.  At the conclusion of formal evidentiary hearings, the hearing officers have recently been advising taxpayers not to expect a written decision and order for at least six months.  The overall effect has been to substantially increase controversy costs for taxpayers and substantially delay resolution of tax disputes in New Mexico.

In an unreported Order granting a taxpayer’s Motion for Summary Judgment in November 2015, some of the Department’s unannounced administrative efforts to reduce payments of the refundable High Wage Jobs Tax Credit took a major blow.  The credit statute was amended in 2013 to address some perceived, and initially unforeseen, flaws to reduce its availability to taxpayers, on a prospective only basis.  The credit was criticized for unnecessarily reducing state tax revenues due to the flaws. However, within a week of the effective date of the amendments, without notice, in 2013 the Department began wholesale denials of credit claims already filed for prior periods on the ground that the amendments had been the law all along (a mere “clarification”), and the Department had been misapplying the statute and misleading taxpayers for the nine years following enactment.  The Administrative Hearing Officer held in favor of the taxpayer, a decision that has consequences far beyond the taxpayer at issue.  That specific matter subsequently settled very quickly and favorably in favor of the taxpayer.

3.         Gross Receipts Tax Imposed on Sales of Tangible Personal Property to State and Federal Governments; Industrial Revenue Bonds

New Mexico has a statutory gross receipts tax deduction for receipts from sales of tangible personal property, other than construction materials, to state, local or federal governmental entities.  For at least 20 years, the Department has had two regulations that provide that the determination of what is tangible personal property opposed to a construction material or fixture is to be determined by use of federal income tax depreciation periods.  These depreciation periods have long been accepted in New Mexico if supported by a federal income tax cost segregation study.  No more.

The Department has been aggressively denying claims for deductions for sales to governmental entities related to construction projects based upon cost segregation studies that were previously allowed without dispute.  The Department now contends that its regulations, still in effect, are beyond statutory intent and now taxpayers must demonstrate that individual pieces of property or equipment are not fixtures (intended to be permanently affixed to the ground) under New Mexico common law of real property.   Several administrative protests are ongoing on these issues.  An administrative Hearing Officer recently ruled against a taxpayer in one of these protests, Protest of Weil Construction, Decision and Order 16-42.

Notwithstanding the logical inconsistency, it appears that at least for now the Department is not challenging the use of cost segregation studies for the deduction for sales of tangible personal property to a governmental entity if the sale is pursuant to an industrial revenue bond agreement with that governmental entity.  Industrial revenue bonds are an important economic development incentive in New Mexico allowing substantial purchases of industrial equipment and related materials without the gross receipts tax or compensating tax (as well as a substantial property tax abatement).  To date, the Department has not articulated a reason for its inconsistent positions on the use of cost segregation studies under regulations still in effect.

Due to clarifying legislative action about ten years ago, hardware for renewable energy projects is insulated from the Department’s change in position.

4.         Good Faith Acceptance of Nontaxable Transaction Certificates

To claim some, but not all, New Mexico gross receipts tax deductions the taxpayer is required to have a nontaxable transaction certificate (“NTTC”), issued by the Taxation and Revenue Department, provided to it by the buyer of its goods or services.  The NTTC requirement, as administered over the years, has been a trap for the unwary that is aggressively applied by auditors.  There are three statutory requirements to claim a deduction requiring an NTTC: 1) it is “properly executed;” 2) it is timely accepted; and, 3) it is accepted in good faith that it supports the deduction claimed. Though not expressly provided for in statute, the Department issues different “types” of NTTCs for different deductions. For example, a Type 2 NTTC applies to receipts from selling tangible personal property for resale.

In recent years there have been several administrative protests based upon accepting an NTTC in good faith, even though not of the correct “type” or the facts establish that the taxpayer was not entitled to the deduction claimed.   A recent administrative decision and order, In the Matter of the Protest of SMPC, P.A., No. 16-45, provides a very thorough analysis of the issue in a decision favorable to the taxpayer who accepted the wrong “Type” NTTC to support its deduction of receipts to which it was otherwise entitled.

D.        TRENDS/OUTLOOK FOR 2017/2018

It is too early to tell what may happen on the legislative front in a likely special session in 2017, or the 2018 regular session, though likely very little due to the Governor’s position on “no new taxes” and, given the budgetary problems, little appetite for tax incentives or other types of revenue reductions.  There may, however, be further efforts to narrow deductions and incentives applicable to the gross receipts and compensating taxes and expect to see some variant of House Bill 412, discussed above, to “reform” the gross receipts tax.






In 2727 San Pedro LLC v. Bernalillo Cty. Assessor, 389 P.2d 287 (2016), the property owner overcame the presumption of correctness in the property valuation.   The county had used a formula that used averaged local data.   to apply the income method The taxpayer prevailed presenting evidence to overcome the presumption of correctness using actual income data.



D.        TRENDS/OUTLOOK FOR 2017/2018

Due to the recent downturn in the New Mexico economy heavily tied to the oil and gas industry, look for continued very aggressive positions by counties and the New Mexico Taxation and Revenue Department on property valuation issues.  Property taxes are insignificant for state tax revenues, but a very significant component of county and municipal tax revenues, as well as important to some degree for public school finances, though public schools also receive considerable funding from the Legislature to equalize education funding. Several counties are considering hiring outside valuation firms to in effect audit property tax taxpayers.


The 2017 Regular Session of the New Mexico Legislature saw passage of several fuel tax increases, subject to the Governor’s active or pocket veto.   These bills are significant because they recognize two things: 1) that the fuel taxes go primarily to state and local road funding in a very large state with significant road repair, maintenance and construction needs; and, 2) a reduction in fuel tax revenue over the years due to increased vehicle fuel efficiency.


House Bill 202 would increase the gasoline tax from 17 cents a gallon to 27 cents. The gasoline tax and the other fuel taxes go primarily to road construction and maintenance funds, so this is intended to address needed New Mexico road repair and improvements.


House Bill 202 would provide for increases in the Petroleum Products Loading Fee.


House Bill 202 would provide for an increase of the Special Fuels Suppliers Tax, primarily applicable to diesel and biodiesel, from 21 cents a gallon to 26 cents a gallon.


House Bill 63 would provide counties and municipalities the ability to tax more fuel sales than previously and allows imposition of higher rates.


House Bill 202 would increase the Motor Vehicle Excise Tax from 3% to 4%. The tax is imposed on the sale of motor vehicles used on New Mexico highways, in lieu of the higher rate gross receipts tax.


House Bill 266 and Senate Bill 254, both of which passed, would remove the exemption from the county- and municipality-imposed “Occupancy Tax” (often referred to as the “Lodger’s Tax”) for rentals of three or fewer rooms. The tax is currently imposed on hotel and motel “lodging” stays of fewer than 30 days.




Secretary of Taxation and Revenue Demesia Padilla resigned abruptly in mid-December 2016 when it became public information that she was under investigation by the New Mexico Attorney General for potential state tax fraud, violations of New Mexico statutes applicable to conduct of state officials, and raising the specter of federal tax fraud. To date, we are not aware of any charges that have been filed. At the time of her resignation Ms. Padilla was also Chair of the Multistate Tax Commission Executive Committee, from which she resigned or was removed.


The Taxation and Revenue Department continues to chronically operate without several key leadership and management positions filled or filled with persons with the necessary skills and experience.  Practitioners and taxpayers almost uniformly agree that the Department is more dysfunctional and unprincipled that at any time in at least the last 25 years.

Almost all employees of the Department with long institutional knowledge (going back 25 or more years) have retired from the Department in recent years, many out of frustration with the Department’s leadership.  Morale is low and turnover is high.  The unfortunate result is that many key decisions are being made by long entrenched middle and lower level management, and line level attorneys with little experience or with a deeply ingrained views that most if not all taxpayers aggressively try to deprive New Mexico of tax revenue.  For the past few years, there does not seem to have been meaningful tax policy control over Department decisions, and weak if any meaningful review of the efforts of inexperienced auditors.


Since December 2015, the Taxation and Revenue Department has had no Chief Counsel.  Recently a Deputy Chief Counsel for tax matters was appointed, Tonya Noonan Herring.  Ms. Herring was a staff attorney for the Department for several years in the past, before leaving for another agency.  The Department has also recently appointed another Deputy Chief Counsel to address matters involving the Motor Vehicle Division of the Department.

The Department’s Legal Services Bureau is stretched very thin because of a greatly increased volume of administrative protests being filed due to failure other components of the Department to act on claims for refund and aggressive denials of tax incentive claims, as well as the departure of several attorneys in the last couple of years.  The Legal Services Bureau has experienced extraordinary and rapid turnover in the last few years.  Many of the current attorneys have no prior state tax experience and have been hired in the last 18 months, several of them in the last 6 months.  Many stay no more than a year or two.

As a consequence of staffing issues, the Department’s attorneys tend to rely on the auditors for the positions they take with taxpayers.  As a result, without any sense of priority, tax policy has often been de facto determined by Department lawyers on an ad hoc, case by case, approach almost always standing behind auditor interpretations of the law, often with little or no independent review or coherent tax policy.


As a result of aggressive audits, denials refunds and credits, the independent New Mexico Hearings Office is overwhelmed with administrative protests.  Some matters can take over a year after a hearing to obtain a final Decision and Order.


House Bill 408 would largely eliminate provisions the Legislature enacted in 2003 to prevent Taxation and Revenue Department contentions that a refund claim could be denied based upon moving-target hurdles that the taxpayer did not adequately support the claim, as well as created unnecessary ambiguities for the refund claim process. The effect of the legislation is to allow the Department to contend that a claim is not “complete” for, in the worst case scenario, an indefinite period without the ability for the taxpayer to contest the lack of action as it currently can. The bill also allows the Department 60 more days to act on a “complete” claim for refund than the current 120.



Tim Van Valen is an attorney with the Sutin, Thayer & Browne law firm in Albuquerque.  Mr. Van Valen’s practice is entirely dedicated to complex state and local tax matters for large businesses, most of which are regional, national or international in scope but with New Mexico activities.  His clients range from oil and gas majors, mining companies and renewable energy developers to national retailers, real estate developers, insurers, construction companies and defense contractors.

Mr. Van Valen counsels clients on state tax analysis and planning as well as representing clients in tax audits, administrative and judicial litigation matters.  In recent years, a substantial part of his practice has been to assist companies looking to invest or expand in New Mexico understand its tax system and available tax incentives.  He also assists clients with drafting legislation that benefits their business or industry, and testimony before committees of the New Mexico Legislature in support of or opposition to legislation.

Mr. Van Valen is a frequent speaker on New Mexico’s tax system and state tax issues in general. He has spoken before the Council on State Taxation (COST), the American Bar Association Tax Section (State and Local Tax Committee), the New Mexico State Bar Tax and Natural Resources Sections, Georgetown University State and Local Tax Symposium, the Institute for Professionals in Taxation (IPT), and has presented seminars for Lorman Education Services, National Business Institute (“NBI”) and LAT Seminars and as well as accounting, civic and other organizations.   He has also done client-specific New Mexico tax presentations.

Mr. Van Valen is author of the New Mexico chapter of the American Bar Association Tax Section’s Sales and Use Tax Deskbook, and is also author of the New Mexico Chapter of the Section’s Property Tax Deskbook as well as that book’s Co-Editor in Chief.  He is a member of the Executive Committee of the ABA Tax Section’s State and Local Tax Committee.

Mr. Van Valen serves on the Board of Directors and Executive Committee of the New Mexico Tax Research Institute.  He serves as Chair of the New Mexico Oil and Gas Association Tax Committee.  He has previously served as Chair of the State Bar of New Mexico Tax Section, has been a member of the New Mexico Association of Commerce and Industry’s Executive Committee and chaired its Tax and Government Affairs Committees.

Mr. Van Valen is a 1978 graduate of Kalamazoo College, and 1986 graduate of Washington University School of Law in St. Louis, Missouri.

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