New Mexico State and Local Tax Alert 2004 Legislative Update

March 05, 2004

Summary
The 30-day 2004 Regular Session of the New Mexico Legislature has concluded with several new pieces of tax legislation passing. Governor Richardson has until March 10 to sign bills forwarded to him in the last three days of the session which ended February 19. Failure to sign within that time period is the functional equivalent of a veto. Set forth below is a summary of the more significant tax bills that have passed both houses of the Legislature and either have been signed or are awaiting signature by Governor Richardson. At the end is also a brief summary of some of the more significant unresolved issues that may reappear in 2005 during a 60-day session. Many bills died without coming to the floor of one or both houses in one of the more frenetic and contentious sessions in recent memory.

 State and Local Tax Legislative Developments in the 2004 New Mexico Legislature Regular Session

The 30-day 2004 Regular Session of the New Mexico Legislature has concluded with several new pieces of tax legislation passing. Governor Richardson has until March 10 to sign bills forwarded to him in the last three days of the session which ended February 19. Failure to sign within that time period is the functional equivalent of a veto. Set forth below is a summary of the more significant tax bills that have passed both houses of the Legislature and either have been signed or are awaiting signature by Governor Richardson. At the end is also a brief summary of some of the more significant unresolved issues that may reappear in 2005 during a 60-day session. Many bills died without coming to the floor of one or both houses in one of the more frenetic and contentious sessions in recent memory.

GROSS RECEIPTS TAX

1. GROSS RECEIPTS TAX RATE INCREASE.

House Bill 625 would increase the state gross receipts tax rate imposed on transactions sourced to a municipality by a half-cent, effective January 1, 2005. This roughly 11 percent increase in the state gross receipts tax is estimated to generate about $145 Million in its first full fiscal year in effect. The purpose of the increase was to offset revenue losses from removing the gross receipts tax from retail groceries and some health care services, discussed below. The tax increase shifts the tax burden from sellers of groceries and some healthcare providers to businesses and persons who consume large amounts of goods and services. The increase is seen by some observers as increasing the regressivity of New Mexico’s tax system and aggravating the effects of tax pyramiding in the gross receipts tax.

2. GROSS RECEIPTS TAX REMOVED FROM RETAIL GROCERIES.

House Bill 625 would create a deduction for gross receipts tax from retail sales of food as defined for federal food stamp program purposes. The bill would require retailers to report receipts from sales of such groceries and then claim a deduction for the receipts. The bill also provides for payments from the state general fund to reimburse local governments for lost local option gross receipts tax revenues, coupled with a stiff penalty for improper filings that is necessary to make the “hold harmless” for local governments work. The deduction does not apply to receipts of restaurants and sellers of prepared foods.

House Bill 625 was highly a controversial measure that passed by a very slim margin in the last half hour of the legislative session following a major campaign by Governor Richardson and Speaker of the House Lujan for its passage. The bill would go into effect January 1, 2005.

3. GROSS RECEIPTS TAX REMOVED FROM SOME HEALTH CARE SERVICES.

House Bill 625 would create a gross receipts tax deduction for some receipts of licensed health care providers (broadly defined) from Medicare Part C and managed health care plans, and health care insurers. New Mexico is one of the few states to broadly tax services, including health care services. The bill also provides for payments from the state general fund to reimburse local governments for lost local option gross receipts tax revenues, coupled with a stiff penalty for improper filings that is necessary to make the “hold harmless” for local governments work. The bill would go into effect January 1, 2005.

4. AUTHORITY FOR LOCAL OPTION REGIONAL TRANSIT GROSS RECEIPTS TAX.

House Bill 231 would provide counties and municipalities within a regional transit district authority to impose a regional transit gross receipts tax of up to a half-cent upon approval by a majority of voters within the respective city or county. All proceeds of the tax would be transferred to the regional transit district for transit management, construction and operation as authorized under the Regional Transit District Act. The bill provides a funding source for regional transit districts provided for in the 2003 regular session. House Bill 231 would be effective July 1, 2005.

5. AUTHORITY FOR ADDITIONAL COUNTY LOCAL OPTION GROSS RECEIPTS TAX.

Senate Bill 88 would reorganize the local option gross receipts tax provisions, and allow counties additional authority to impose gross receipts tax. The bill would expand county authority to impose gross receipts tax from 6/16% to 7/16%. The bill would also change the requirements for when county gross receipts tax increases must go to the voters for approval, in effect giving the county commissions authority to impose 3/16 of the total county gross receipts tax without voter approval. The bill would go into effect July 1, 2004.

PROPERTY TAX

1. PROPERTY TAX TO FUND HEALTH CARE FOR SICK AND INDIGENT PERSONS.

Senate Bill 518 would allow counties to impose up to an additional $1.50 per $1,000 of net taxable value in property taxes with voter approval. Currently, as drafted, the bill would only apply to Rio Arriba County.

NURSING HOME BED TAX

1. “DAILY BED SURCHARGE.”

Already signed into law by Governor Richardson, Senate Bill 385 imposes a “daily bed surcharge” on each licensed nursing home, intermediate care facility for the mentally retarded and licensed residential treatment centers for each occupied bed. The bill is effective July 1, 2004 with a sunset of June 30, 2007. The tax rate is to be determined annually by the Human Services Department under criteria in the statute. It appears that the amount of the tax will be in the vicinity of about $8.82 per day per bed. The purpose of the bill appears to be to increase State Medicaid costs so that New Mexico can qualify for a larger amount of federal matching funds for Medicaid.

2. BED SURCHARGE CREDIT.

Senate Bill 436 would allow individuals to claim a credit against personal income tax not to exceed $10 per day for expenses incurred and paid to a licensed nursing home, intermediate care facility for the mentally retarded or licensed residential treatment center. This bill is intended as an offset for individuals for the daily bed surcharge. While the credit is not refundable, it can be carried forward for up to four years.

INSURANCE PREMIUM TAX

1. INSURANCE PREMIUM SURTAX.

Senate Bill 502 added an insurance premium surtax of 1% to the current 3% premium tax upon gross health insurance premiums and membership and policy fees of health care insurers, health maintenance organizations and non-profit healthcare plans. The surtax goes into effect for contracts issued or renewed on or after July 1, 2004.

2. APPLICATION OF 2003 AMENDMENTS REMOVING PREMIUM TAX EXEMPTION FOR STATE MANAGED CARE CONTRACTS.

Senate Bill 502 provides that the 2003 removal from the insurance premium tax exemptions of premiums from insurers contracting with the State of New Mexico to provide Medicaid coverage does not apply to premiums received before the effective date of the amendment, March 20, 2003. The bill further provides that any overpayments resulting from this change can be claimed as a credit against premium tax payments on or after July 1, 2004. The bill would go into effect July 1, 2004.

MOTOR VEHICLE EXCISE TAX

1. GASOLINE ELECTRIC HYBRID VEHICLES.

Senate Bill 86 provides a one-time exemption from the motor vehicle excise tax for gasoline-electric hybrid vehicles. The motor vehicle excise tax is imposed on highway vehicles at 3% of their value at the time of transfer of title. The bill would go into effect July 1, 2004.

ECONOMIC DEVELOPMENT INCENTIVES

1. HIGH-WAGE JOBS TAX CREDIT.

The Governor has signed Senate Bill 28 which provides a refundable “high-wage jobs tax credit” as an inducement for drawing employers who can provide higher wage jobs in New Mexico. The bill provides for an annual tax credit equal to 10 percent of wages and benefits paid for each new job created by a qualified employer on or after July 1, 2004 that pays at least $28,000 a year in communities with a population of less than 40,000 and at $40,000 a year in communities with a population of more than 40,000. The credit is capped at $12,000 per eligible employee. The credit can be claimed against a taxpayer’s aggregate state (but not local) gross receipts tax, compensating tax and state withholding tax. The credit may be claimed in the year in which the high wage job was created and the following three years. To claim the credit the qualifying job must have been occupied for at least 48 weeks. Qualified employers are those who are eligible for development training program assistance and have more than 50 percent of their sales outside New Mexico. The credit provisions would sunset in 2010.

2. AIRBORNE TACTICAL LASERS.

House Bill 278 would provide a compensating (“use”) tax deduction for equipment, replacement parts and other components of airborne tactical laser weapon systems manufactured, fabricated or assembled outside of New Mexico and brought into the state for testing for the Department of Defense at a major range and test facility. This deduction addresses an apparent recent shift in ownership of weapon prototypes undergoing testing in New Mexico from the federal government to private contractors. The bill would go into effect immediately upon signature by Governor Richardson.

3. DEPARTMENT OF DEFENSE TESTING.

Senate Bill 333 would provide a compensating (“use”) tax deduction for the value of “test articles” upon which research and testing is conducted in New Mexico pursuant to a contract with the Department of Defense. The deduction does not apply to the value of property purchased by a national laboratory prime contractor. Thus, the deduction applies to private contractors at New Mexico’s Air Force bases and White Sands Missile Range. As with the preceding deduction, this deduction addresses an apparent recent shift in ownership of weapons undergoing testing in New Mexico from the federal government to private contractors. The ultimate goal is to increase contractor presence at New Mexico’s military bases to protect them in the next round of federal Base Closure and Realignment activities. The bill would go into effect immediately upon signature by Governor Richardson.

NONTAXABLE TRANSACTION CERTIFICATES

The death of a bill in the Senate Finance Committee, rather than its passage, will force gross receipts tax changes on taxpayers effective January 1, 2005. The Taxation and Revenue Department had wanted to extend the life of the currently effective 1992 Series of non-taxable transaction certificates (“NTTC’s”) beyond December 31, 2004, rather than issue a new series, because the non-taxable transaction certificate system as we know it would become obsolete if New Mexico adopts the Streamlined Sales Tax in the next few years. The Department figured that it would be less of a burden for the Department and taxpayers to extend the current series two or three years, rather than face the prospect of doing it twice in the same time period, once for 2005 and again if the Streamlined Sales Tax is implemented.

Unfortunately, the Department and taxpayers will now have to work through issuance of an entirely new series of nontaxable transaction certificates whether or not New Mexico adopts the Streamlined Sales Tax. By statute, after December 31, 2004, the 1992 Series certificates will not support deductions for receipts from sales occurring after that date. As a consequence, the Department will have to issue a 2005 series of non-taxable transaction certificates, and buyers of goods and services will have to take obtain new certificates to give to existing and future vendors. Under the present statute, the 2005 series nontaxable transaction certificates will be able to be used to claim deductions for transactions occurring before January 1, 2005, as well as after. Vendors, however, are well advised to keep all 1992 Series nontaxable transaction certificates currently in their possession.

When there has been a transition in the past, there has been considerable confusion by buyers and sellers. In particular, sellers have been denied deductions because they attempted to claim a deduction based upon an old, void, nontaxable transaction certificate for a transaction occurring after the series changed.

Stay tuned for information from the Taxation and Revenue Department on implementation of the new series of non-taxable transaction certificates, whether you are a buyer or seller of goods and services.

BILLS THAT FAILED AND/OR ISSUES TO LOOK FOR NEXT YEAR

Next year’s session of the Legislature could be difficult for business taxpayers due to fiscal constraints. The personal income tax cuts enacted in 2003 will be further phased in; there appears to be only a limited effort to control Medicaid expenditures which are gobbling up tax revenues at an increasing clip; and state oil and gas revenues may decrease if prices decrease. There also appear to have been some accounting or book keeping changes that will come home to roost in 2005, also requiring either substantially greater tax revenues or substantial belt tightening.

There are several issues that have arisen before the Blue Ribbon Tax Reform Commission and/or the 2004 Regular Session to be on the lookout for in 2005:

1. R&D START-UP TAX CREDIT.

This bill, also introduced in prior sessions, would have provided a credit for up to three years against payment of the state portion of gross receipts tax, the compensating tax and withholding taxes for start-up businesses that spend at least 20 percent of revenues on qualified research and development. The bill appears to have failed due to concerns over the fiscal impact.

2. TAX ADMINISTRATION.

A bill agreed upon between business organizations and the Taxation and Revenue Department would have reduced interest on tax deficiencies, reduced complexity of the nontaxable transaction certificate program, revised the protest process and authorized New Mexico participation in the Streamlined Sales Tax Project (“SSTP”). The interest portion (15%) was stripped out early in the session. The remaining portions of the bill were non-controversial, but got lost in the process as the session ended. Next year, look for a revised version of this bill that will additionally address New Mexico’s tax penalties, the tax refund process and separating the administrative protest process from the Taxation and Revenue Department. In a separate bill, the Taxation and Revenue Department unsuccessfully sought several Tax Administration Act amendments it believed would enhance its tax fraud investigation unit.

3. DECOUPLING THE NEW MEXICO ESTATE TAX FROM THE FEDERAL ESTATE TAX.

There was a bill introduced to continue the viability of New Mexico’s estate tax by decoupling it from the Federal estate tax and taking it back to the version of the federal estate tax in effect in 2000.

4. ADDING BACK INTO THE NEW MEXICO INCOME TAX BASE THE FEDERAL DEDUCTION FOR STATE TAXES.

New Mexico’s personal income tax starts from the federal income tax return with certain adjustments. This bill would have required adding back into the state tax base the amount taken as a federal deduction for state taxes. This bill appears to have been designed to cut back in part the effect of the personal income tax rate reduction enacted in 2003, particularly as to higher income persons.

5. COMPENSATING (“USE”) TAX ISSUES.

New Mexico’s compensating tax (a “use tax”) does not apply to most services performed outside of New Mexico and is only imposed by the state. This session saw an effort by municipalities to obtain an automatic compensating tax equal to the amount of their local option gross receipts tax. Though never introduced, before the session, there was also talk of expanding the compensating tax to all out-of-state services. If that had come to pass, New Mexico’s tax system would have been very uncompetitive with other states and the tax would have been imposed on New Mexico businesses. In addition, the pyramiding issues within the gross receipts tax system would have only been aggravated.

6. CREDIT FOR SERVICES SUBJECT TO THE GROSS RECEIPTS TAX PURCHASED BY BUSINESSES.

This bill would have offered a partial credit to businesses purchasing services subject to the gross receipts tax. The objective was to reduce, though not eliminate, the pyramiding of gross receipts tax upon businesses, particularly for consumed services not generally subject to tax in other states. The bill failed primarily because of its large estimated fiscal impact, which also served to illustrate the magnitude of the pyramiding problem. Governor Richardson has stated that next year he wants to address pyramiding issues in the gross receipts tax.

7. MANUFACTURING EQUIPMENT.

While not introduced, for some time business groups have been advocating a gross receipts tax deduction for manufacturing equipment. New Mexico, unlike many states, taxes such equipment, adding to tax pyramiding within the gross receipts tax structure. The Investment Credit addresses this issue in part, but is tied to increased employment and is cumbersome to apply for and there can be long delays in approval by the Taxation and Revenue Department. The Investment Credit, because of its tie to increased employment does not provide any incentive for replacing and modernizing equipment of existing New Mexico businesses which does not result in an increased number of jobs.

8. SUBJECTING THIRD PARTY INSURANCE ADMINISTRATORS TO THE GROSS RECEIPTS TAX.

This bill attempted to impose the gross receipts tax on third-party administrators of insurance plans. It appears that many third-party administrators are already subject to the gross receipts tax, but some plans administered by insurers escape taxation under the “in lieu of” provision in the Insurance Code that provides that the only taxation of most insurers is the Insurance Premium Tax. This bill was said to have had an adverse effect on self-insured businesses using a third-party administrator.

9. MANDATORY COMBINED FILING FOR UNITARY CORPORATIONS.

Though not introduced in the 2004 Regular Session, there was considerable discussion before the 2003 New Mexico Blue Ribbon Tax Reform Commission regarding whether New Mexico should require unitary corporations to file as a unitary combination. The rationale of the proponents is that requiring unitary combinations would minimize corporate tax planning opportunities created by the option for separate entity filing. At present, New Mexico allows corporations to file as separate entities, unitary combination or based upon a federal consolidated return. Look for this issue to resurface in the future.

MODRALL SPERLING’S STATE & LOCAL TAX SERVICES

Modrall Sperling’s state and local tax lawyers have long handled some of the most significant state and local tax matters in New Mexico. Those matters include not only contested tax matters, but also managing audits, obtaining revenue rulings for and participating in Department rule making efforts on behalf of our clients. Our state and local tax attorneys are also called upon to provide advice with respect to New Mexico tax consequences of mergers, acquisitions and other commercial transactions. In addition, we analyze proposed legislation on behalf of clients and offer testimony as tax experts before various legislative committees. We also assist clients in managing the audit process.

All areas of state and local tax are covered with our unique expertise in this area including corporate income tax, gross receipts tax, property tax and industry specific taxes such as severance, premiums, tobacco, gasoline, motor fuel and transportation. Over the years we have and continue to work with major businesses inside and outside of New Mexico including those in retailing, manufacturing, high tech, mining, oil & gas and others.

Our state and local tax attorneys work closely with other Modrall Sperling practice groups and departments, particularly our Governmental Affairs Group and our Natural Resources Department.