Tax Alert: Taxation of Intangible Property and Claims for Refund

December 28, 1999

Summary
The New Mexico Legislature's joint interim Revenue Stabilization and Tax Policy Committee has before it proposals from the Taxation and Revenue Department that attempt to radically alter and increase New Mexico's taxation of receipts from transactions relating to intangible personal property, including software, trademarks and trade names, copyrights on printed materials, patents, and possibly also franchise-type relationships. The Department proposes statutory amendments to UDITPA and the Gross Receipts and Compensating Tax Act. It remains to be seen whether the proposed legislation will actually be introduced during New Mexico's short 30 day legislative session for the year 2000 which begins January 18, 2000.

TAXATION AND REVENUE DEPARTMENT PROPOSES STATUTORY AMENDMENTS TO INCREASE TAXATION OF SALES AND LICENSING OF INTANGIBLE PROPERTY

The New Mexico Legislature's joint interim Revenue Stabilization and Tax Policy Committee has before it proposals from the Taxation and Revenue Department that attempt to radically alter and increase New Mexico's taxation of receipts from transactions relating to intangible personal property, including software, trademarks and trade names, copyrights on printed materials, patents, and possibly also franchise-type relationships. The Department proposes statutory amendments to UDITPA and the Gross Receipts and Compensating Tax Act. It remains to be seen whether the proposed legislation will actually be introduced during New Mexico's short 30 day legislative session for the year 2000 which begins January 18, 2000.

A. INCOME TAX.

New Mexico has adopted, as have many states, a form of UDITPA to address allocation and apportionment of income of taxpayers with income from more than one state. The proposal before the Committee would amend NMSA 1978, § 7-4-18, a provision which corresponds to § 17 of UDITPA. That section governs sourcing of receipts for purposes of the numerator of the sales factor when receipts are derived from "other than tangible personal property." At present, UDITPA § 17 sources receipts from intangible property utilizing the all or none cost of performance methodology.

The proposal before the Committee would abandon the cost of performance methodology in favor of a specific sourcing rule for receipts derived from intangible property. The proposal would add a new subsection that sources to New Mexico "royalties or other income" received from "the use or for the privilege of using intangible property" in New Mexico. The provision would further state that intangible property is used in New Mexico "if the purchaser uses the property or the rights therein in the regular course of the purchaser's business operations in [New Mexico], regardless of the location of the purchaser's customers."

It is not clear from the draft legislation exactly what would be considered to be "use" of intangible property in New Mexico and who would or might be considered to be a "user." It is also not clear if the legislature really intends to subject receipts from licensing intangible property to apportionment to New Mexico if the intangible property is never present or "used" in the state.

While perhaps only intended by the Department to address income from licensing of intangible property amongst related companies similar to the situation illustrated by Geoffrey v. South Carolina Tax Comm'n, 437 S.E.2d 13 (S.C. 1993), the proposed legislation appears to be much broader in effect.

B. GROSS RECEIPTS TAX.

The Department also proposes to significantly increase gross receipts tax revenues arising out of licensing of intellectual property and perhaps sales of franchises.

New Mexico imposes its gross receipts tax upon a seller's receipts from the sale of tangible personal property, specific intangible personal property and real property sold in New Mexico or a lease of such property if "employed" in New Mexico. By statute, however, the grant of a license to use property is the sale of a license, not a lease. NMSA 1978, § 7-9-3(J). Accordingly, receipts associated with licenses of intangible property that fall within Act ("licenses, franchises, patents, trademarks and copyrights"-- NMSA 1978, § 7-9-3(I)) and are granted out-of-state are not subject to the gross receipts tax because they come from a sale of property outside of New Mexico.

Nonetheless, the Taxation and Revenue Department proposes to add a subsection to the statutory definition of "gross receipts" in NMSA 1978, § 7-9-3(F)(1) upon which the gross receipts tax is imposed to include "amounts from allowing the use of licenses, franchises, patents, trademarks and copyrights in New Mexico." The Department does not propose any changes to the statutory definitions of "property" or "leasing" discussed above that exclude receipts from licensing that occurs outside of New Mexico from the gross receipts tax. Again, as with the proposal for UDITPA, it is not clear whether the Department intends to impose the gross receipts tax on moneys received for licensing of intangible property that is never in fact used in New Mexico, regardless of constitutional nexus with New Mexico. It is also unclear what falls under the rubric of "allowing use" of various types of intangible property or how frequently a taxpayer could be considered to have receipts from allowing "use of a license" when a license is the right to use property. It appears that the legislation is another sweeping attempt to fix Geoffrey-type situations, as well as other issues the Department faces in pending litigation with the Department relating to receipts under franchise agreements.

TAXATION AND REVENUE DEPARTMENT PROPOSES LEGISLATION TO ALTER REFUND CLAIM TIMING AND PROCEDURE

The New Mexico Legislature's joint interim Revenue Stabilization and Tax Policy Committee also has before it the Taxation and Revenue Department's proposal to amend the provisions relating to claims for refund.

Presently, taxpayers may file a claim for refund within three years of the later of the date payment of tax was made due to an assessment, payment was made, or the payment was originally due. NMSA 1978, § 7-1-26. The Department proposes to shorten the period for a claim for refund to one year if the taxpayer overpaid more than three years after the end of the calendar year of the date the tax was due or the date of an assessment.

The Department also proposes a very confusing change relating to the timing and effect of its failure to timely act on a claim for refund in a manner that in effect shifts to the taxpayer more of the burden and expense of its failure to act. Presently, if the Department fails to act upon a claim for refund within 120 days, it is deemed denied, the Department may not further act on the claim, and a taxpayer may pursue an administrative protest or a suit in state court within specified time periods. The Department wants to stretch its action date on claims for refund to 210 days, after which the taxpayer can pursue a suit or administrative protest. In addition, if, but only if, a taxpayer pursues an administrative protest or suit, the Department will continue to have the ability to rule on the claim for refund during the pendency of those proceedings.

As with the proposed legislation relating to taxation of intangible personal property related transactions, it is unknown at this time whether the proposed legislation will actually be introduced during the upcoming session of the New Mexico Legislature.