United States: New Mexico Enacts Legislation Allowing Single Sales Factor Election For Corporate Headquarters, Amending Credits And Deductions

On June 15, New Mexico Governor Susana Martinez approved a tax package that was passed during a brief special legislative session.1 The legislation includes a new single sales factor apportionment election for corporations that have a headquarters in the state and combines existing tax credits into a new technology jobs and research and development (R&D) credit. Also, the legislation extends the filing and payment deadline for corporate income tax and franchise tax returns if electronic media is used. The legislation also revives a gross receipts tax deduction for trade-support companies and adds a new deduction for certain contractors with the U.S. Department of Defense. Further, the legislation increases the angel investment tax credit that may be taken against personal income tax and enacts a new personal income tax deduction for unreimbursed or uncompensated medical care expenses.

Single Sales Factor Apportionment for Corporate Headquarters

New Mexico is one of the few remaining states that generally uses an equally-weighted three-factor formula to apportion income to the state for corporate income tax purposes.2 However, existing law allows a taxpayer whose principal business is manufacturing to make a single sales factor apportionment election.3 The recent legislation clarifies that this election for manufacturers is only available to taxpayers whose principal business activity in New Mexico is manufacturing.4 Further, for taxable years beginning on or after January 1, 2015, a taxpayer whose principal business activity in New Mexico is a "headquarters operation" also may elect to use a single sales factor formula.5

"Headquarters operation" means the center of operations of a business:

  • Where corporate staff employees are physically employed;
  • Where centralized functions are performed, including administrative, planning, managerial, human resources, purchasing, information technology and accounting (excluding call center operations);
  • The function and purpose of which is to manage and direct most aspects and functions of the business operations within a subdivided area of the United States;
  • From which final authority over regional or subregional offices, operating facilities and any other offices of the business are issued; and
  • Including national and regional headquarters if the national headquarters is subordinate only to the ownership of the business or its representatives and the regional headquarters is subordinate to the national headquarters.6

Alternatively, "headquarters operation" means the center of operations of a business: (i) the function and purpose of which is to manage and direct most aspects of one or more centralized functions; and (ii) from which final authority over one or more centralized functions is issued.7 The election procedures for corporate headquarters are the same as the election procedures for manufacturers.8 A taxpayer that makes this election receives the additional benefit of not being required to throw back sales of tangible personal property if the taxpayer is not taxable in the state of the purchaser of such property.9

Corporate Income Tax and Franchise Tax Filing Dates

As a means to encourage more electronic filings by taxpayers, for taxable years beginning on or after January 1, 2015, a corporation that is required to file and pay New Mexico corporate income tax and franchise tax and approved by the Department to use electronic media has until the 30th day of the third month following the end of the tax year to file and pay the tax.10 Generally, the New Mexico corporate income tax and franchise tax must be filed and paid by the 15th day of the third month following the end of the tax year.11

Technology Jobs and R&D Tax Credit

Effective January 1, 2016, the technology jobs tax credit is combined with the R&D small business tax credit to form a new technology jobs and R&D tax credit.12 This credit is comprised of a "basic" credit that may be claimed against a taxpayer's compensating tax, withholding tax or gross receipts tax and an "additional" credit that may be taken against corporate and personal income taxes.13 According to the fiscal impact report, the legislation "amends current qualifying criteria to provide additional benefit and allow for greater participation." The basic and additional credits are increased from 4 percent to 5 percent of the qualified expenditures for conducting qualified research at a qualified facility.14 As amended, the basic credit may not be taken against local option gross receipts taxes.15 The carryforward period for unused basic and additional credits is three years.16 The legislation includes provisions on the transition of the R&D small business credit.17

A definition of "qualified research and development small business" is added to the credit.18 This term means a taxpayer that: (i) employed no more than 50 employees in the taxable year for which an additional credit is claimed; (ii) has total qualified expenditures of no more than $5 million in the taxable year for which the credit is claimed; and (iii) did not have more than 50 percent of its voting securities or other equity interest with the right to designate or elect the board of directors or other governing body of the business owned directly or indirectly by another business.19

The definition of "rural area" is expanded to include a broader range of areas.20 Under existing law, the basic and additional credits are doubled if the qualified facility is in a rural area.21 The legislation also adds a new provision that allows certain small businesses to obtain a refund of the additional credit.22

Gross Receipts Tax Deductions

Trade-Support Company in Border Zone

Effective January 1, 2016, the legislation reinstates the gross receipts tax deduction for trade-support companies in a border zone.23 Specifically, the receipts of a trade-support company may be deducted from gross receipts if: (i) the company first locates in the state within 20 miles of a port of entry on the border with Mexico on or after January 1, 2016 but before January 1, 2021; (ii) the receipts are received by the company within a five-year period beginning on the date it locates in the state and receipts are derived from its business activities and operations at its border zone location; and (iii) the company employs at least two employees in the state.24 Previously, this deduction only applied to trade-support companies that first located in the area described above on or after July 1, 2003 but before July 1, 2013.

U.S. Department of Defense Energy Gross Receipts

Effective January 1, 2016, a new gross receipts tax deduction is provided for a qualified contractor's sale of qualified R&D services and qualified directed energy and satelliterelated inputs when sold under a contract with the U.S. Department of Defense.25 The deduction is available prior to January 1, 2021 and applies to contracts entered into on or after January 1, 2016.

Personal Income Tax Credits and Deductions

Angel Investment Credit

For taxable years beginning on or after January 1, 2015, the angel investment credit that may be taken against the New Mexico personal income tax is amended.26 Accredited investors that make a qualified investment may claim a credit of 25 percent of the qualified investment up to a maximum credit of $62,500.27 The amendments eliminate some of the restrictions on the type and number of investments. As amended, a taxpayer is limited to one qualified investment per investment round28 and may claim the credit for qualified investments in up to five qualified businesses per year.29 There is no longer a $25,000 limitation on the total credit amount that may be claimed by the members of a partnership or business association.30 The annual aggregate credit amount is increased from $750,000 to $2 million and the sunset date is extended from December 31, 2016 to December 31, 2025.31 Also, the carryforward period for unused credit amounts is increased from three to five years.32

Unreimbursed or Uncompensated Medical Care Expenses Deduction

For taxable years beginning on or after January 1, 2015, a new personal income tax deduction is provided for unreimbursed or uncompensated medical care expenses.33 Specifically, a taxpayer may claim a deduction from net income of a percentage of medical care expenses paid during the taxable year for medical care of the taxpayer, the taxpayer's spouse or dependent if the expenses are not reimbursed or compensated for by insurance and have not been included in the taxpayer's itemized deductions.34 The percentage of medical care expenses that may be deducted, which ranges between 10 percent and 25 percent, varies depending on the taxpayer's filing status and adjusted gross income.35

Commentary

This tax package was considered by the legislature and passed during a one-day special session. However, these provisions were previously introduced in different bills during the regular legislative session. The provisions are generally favorable to taxpayers and should be carefully considered. In particular, companies that satisfy the "headquarters operation" requirements should evaluate whether it would be beneficial to make the single sales factor apportionment election. Unlike the apportionment election for manufacturers that was enacted in 2013, the election for corporate headquarters is not being phased in over a period of several years and is immediately available for the 2015 tax year. Also, the technology jobs and R&D credit has been expanded and is now available to additional taxpayers. Certain taxpayers may benefit from the new or revived gross receipts tax deductions. Individual taxpayers should consider the amended angel investor credit and the new deduction for unreimbursed or uncompensated medical care expenses.

Footnotes

1 Ch. 2 (H.B. 2), 1st Special Session, Laws 2015. For further information, see Fiscal Impact Report for H.B. 2 (Special Session), New Mexico Legislative Finance Committee, June 3, 2015.

2 N.M. STAT. ANN. § 7-4-10.A.

3 N.M. STAT. ANN. § 7-4-10.B. The election for manufacturers is available for tax years beginning on or after January 1, 2014 and is being phased in over a five-year period.

4 Id.

5 N.M. STAT. ANN. § 7-4-10.C.

6 N.M. STAT. ANN. § 7-4-10.E(1)(a).

7 N.M. STAT. ANN. § 7-4-10.E(1)(b).

8 N.M. STAT. ANN. § 7-4-10.D. A taxpayer must notify the New Mexico Taxation and Revenue Department of the election, in writing, no later than the date on which the taxpayer files the return for the first taxable year to which the election will apply. The taxpayer may not terminate the election until it has used the extra-weighted sales factor for at least three consecutive taxable years (meaning at least 36 calendar months). The election applies to separately filed returns as well as combined or consolidated returns.

9 N.M. STAT. ANN. § 7-4-17.B(2)(b).

10 N.M. STAT. ANN. § 7-2A-9.C.

11 N.M. STAT. ANN. § 7-2A-9.A.

12 N.M. STAT. ANN. §§ 7-9F-1 et seq. These provisions apply to taxpayers that make a qualified expenditure beginning on or after January 1, 2015. Effective January 1, 2016, the small business R&D credit (N.M. STAT. ANN. §§ 7-9H-1 to 7-9H-6) is repealed. H.B. 2, § 24.

13 N.M. STAT. ANN. §§ 7-9F-9.B; 7-9F-9.1.B. Under existing law, a taxpayer may claim the additional credit if: (i) the taxpayer increases its payroll expense at the qualified facility by at least $75,000 over the base payroll expense; (ii) this increase has not previously been used to meet the additional credit requirements; and (iii) there is at least a $75,000 increase in the taxpayer's annual payroll expense for every $1 million in qualified expenditures claimed by the taxpayer in a taxable year in the same claim. N.M. STAT. ANN. § 7-9F-6.B.

14 N.M. STAT. ANN. § 7-9F-5. The terms "qualified expenditure," "qualified research," and "qualified facility," which drive eligibility determination and are defined in the New Mexico statute, are not substantively amended in the legislation. See N.M. STAT. ANN. § 7-9F-3.G, H, I.

15 N.M. STAT. ANN. § 7-9F-9.B.

16 N.M. STAT. ANN. §§ 7-9F-9.C; 9F-9.1.D.

17 H.B. 2, § 22. A taxpayer that becomes eligible for the R&D small business tax credit prior to January 1, 2016 but has not claimed the credit prior to this date may claim the credit under the provisions of the R&D small business credit in effect prior to January 1, 2016. The Department will approve claims submitted but not approved prior to January 1, 2016 if the claim meets the requirements of the R&D small business credit. Claiming the R&D small business credit for a reporting period renders the taxpayer ineligible to claim a credit for the same reporting period under the technology jobs and R&D credit.

18 N.M. STAT. ANN. § 7-9F-3.J.

19 Under the R&D small business credit, a small business may not have more than 25 full-time employees. Also, the qualified research expenditures must be at least 20 percent of total expenditures. N.M. STAT. ANN. § 7-9H-2.C.

20 N.M. STAT. ANN. § 7-9F-3.K.

21 N.M. STAT. ANN. § 7-9F-8.

22 N.M. STAT. ANN. § 7-9F-9.1.

23 N.M. STAT. ANN. § 7-9-56.3. A "trade-support company" means a customs brokerage firm or a freight forwarder. N.M. STAT. ANN. § 7-9-56.3.D(3).

 24 N.M. STAT. ANN. § 7-9-56.3.A.

25 H.B. 2, § 9. The purposes of this deduction are to promote new and sophisticated technology, enhance the viability of directed energy and satellite projects, attract new projects and employers to the state and increase high-technology employment opportunities in the state.

26 N.M. STAT. ANN. § 7-2-18.17.

27 N.M. STAT. ANN. § 7-2-18.17.A. Previously, the amount of a qualified investment was limited to $100,000, resulting in a maximum credit of $25,000.

28 "Investment round" means an offer and sale of securities and all other offers and sales of securities that would be integrated under Regulation D issued by the federal Securities and Exchange Commission. N.M. STAT. ANN. § 7-2-18.17.K(4).

29 N.M. STAT. ANN. § 7-2-18.17.B. Under prior law, a taxpayer could only claim the credit for up to two qualified investments in a taxable year, and only if the two investments were in different qualified businesses.

30 N.M. STAT. ANN. § 7-2-18.17.H.

31 N.M. STAT. ANN. § 7-2-18.17.C, E.

32 N.M. STAT. ANN. § 7-2-18.17.J.

33 H.B. 2, § 3. The deduction is available prior to January 1, 2025.

34 H.B. 2, § 3.A.

35 H.B. 2, § 3.B.

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