New Mexico Switching to Destination-Based Sourcing
Don’t hit snooze ̶ significant changes to gross receipts tax are approaching fast!
Back in April 2019, New Mexico Governor Michelle Lujan Grisham signed House Bill 6 into law, initiating complex changes to New Mexico tax laws over a seven-year period, some of which were effective immediately while others are to be phased in through July 2026.
One of the phased-in changes that will impact thousands of businesses takes effect in a little under a year, on July 1, 2021. On that day, gross receipts tax for tangible personal property and general services will move to destination-based sourcing. Currently, the gross receipts tax rate is determined by the location of the business. Destination-based sourcing, on the other hand, will mean the gross receipts tax rate will be determined by the location to which the tangible personal property is delivered, or where the general services are performed.
This change significantly impacts the way in which businesses will have to report their gross receipts.
An Albuquerque business that ships goods statewide but only reports gross receipts at the Albuquerque location code will then have to report gross receipts to location codes across the state. This also impacts out-of-state businesses that currently only report all gross receipts on goods delivered into the state while using the out-of-state location code.
New Mexico has over 250 possible location codes into which a business can potentially report gross receipts. Without proper preparation, this change to destination-based sourcing can cause many accounting headaches for businesses. Most businesses will need to look into tax calculator software that will determine the gross receipts tax rate and location code using the delivery address. Businesses may also need to upgrade point-of-sale systems in order to implement this change.
The changes that take effect in 2021 will not impact the taxation of professional services, where gross receipts tax is determined by the seller’s place of business. Additionally, taxpayers engaged in construction and selling of real estate will continue to report according to place of business, which for construction is the location of the construction project and for selling real estate is the location of the real property.
Although the change to destination-based sourcing does not take effect for another year, most businesses will find that it takes months of research, preparation and testing to implement the change and stay compliant with New Mexico laws. REDW’s State and Local Tax specialists James Ortiz and Jacquelyn Armer can help you navigate how this change impacts your business.
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