For Your Information
Tax Information/Policy Office ¨ P.O. Box 630 ¨ Santa Fe, New Mexico 87504-0630
COMPENSATING TAX
Compensating Tax, sometimes called a "use" tax, was first imposed in 1939 under the Compensating Tax Act, a companion to the Emergency School Tax Act. It was merged into the Gross Receipts and Compensating Tax Act In 1967.
The purpose of compensating tax is to protect New Mexico businesses from unfair competition from untaxed transactions by businesses located outside New Mexico.
CONTENTS
Agent for Collection of Compensating Tax
Exemptions from Compensating Tax
Deductions from Compensating Tax
Credits Against Compensating Tax
FYI-230 ¨ REV. 2/00
Compensating tax is imposed on persons using property, and in some cases, services, in New Mexico on which tax has not been paid to New Mexico or any other state [7-9-7]*. The tax "compensates" for the absence of a gross receipts tax on the purchase of property for use; hence its name.
The tax primarily applies in two types of transactions.
1) Compensating tax is imposed when goods purchased out of state (including orders placed by mail or electronically) for use in New Mexico would have been subject to gross receipts tax had the sale occurred in New Mexico (see examples 1 through 5 beginning on page 6).
In this type of transaction, the compensating tax protects New Mexico businesses from unfair competition from out-of-state businesses not subject to a sales or gross receipts tax. The tax serves to "level the playing field."
2) Compensating tax is imposed when a business purchases, either in state or out of state, an item or service in a nontaxable exchange (usually by issuing a Nontaxable Transaction Certificate [NTTC] for the purpose of resale) but subsequently uses the item or service for a purpose other than resale. See examples 6 through 10.
This type of transaction also occurs when instead of selling, a business uses property it manufactured. In this type of transaction, the compensating tax serves to rectify a situation in which a gross receipts tax should have been imposed at some point in the distribution chain but was not.
Individuals owe compensating tax on purchases from out-of-state vendors whether by mail order, television sales programs, or other means. The Department is prohibited, however, from taking any active steps to collect compensating tax if the products purchased are for the personal, noncommercial use of the purchaser [7-9-7.1].
The prohibition does not apply to purchases of manufactured housing regardless of use. It does not cover persons who are agents for collection of compensating tax (see below). The Department is free to — and does — enforce compensating tax owed by businesses.
Households that move to New Mexico are exempt from tax on the value of personal and household effects moved in [7-9-27].
AGENT FOR COLLECTION OF COMPENSATING TAX
In most cases the buyer is liable for paying the compensating tax to the state. However, if the seller has sufficient presence in New Mexico and makes sales into New Mexico that are not subject to the gross receipts tax, New Mexico requires the seller to collect the compensating tax from the New Mexico buyer and to report and remit it to the Department. Please refer to the following guidelines for determining if you are an agent for collection of compensating tax, and to Example 11 on page 9.
A person is an agent for collection of compensating tax when that person directly or by an agent:
"Activity" includes:
The compensating tax rate is 5% of the value of the property or service at the time of acquisition or introduction into New Mexico, or at the time of conversion to taxable use, whichever is later.
*Numbers in brackets [ ] refer to statutes compiled in New Mexico Statutes Annotated, 1978.
"Value" refers to the adjusted basis of the property for federal income tax purposes. If there is no adjusted basis, a "reasonable value" shall be used.
Unlike the gross receipts tax, liability for compensating tax rests with the buyer or user rather than with the seller. The buyer meets the tax obligation, however, if the buyer pays compensating tax to a seller who is an agent for the collection of compensating tax. If this is the case, the compensating tax must be stated separately on the invoice to verify payment [7-9-9].
Compensating tax is reported with gross receipts tax and withholding tax on the CRS-1 Form. (CRS stands for "Combined Reporting System.") The CRS-1 form is in the CRS-1 Filer's Kit mailed twice yearly to businesses registered with the Taxation and Revenue Department. The CRS-1 Filer's Kit is available at all local tax offices (see FOR FURTHER ASSISTANCE on page 11).
The CRS-1 form and taxes are due on the 25th of the month following the end of your report period. The report period generally is each month, but may be quarterly or semiannually for taxpayers whose CRS tax liability averages less than $200 per month. Please refer to the CRS-1 Filer's Kit for additional information.
EXEMPTIONS FROM COMPENSATING TAX
Transactions that are exempt from compensating tax do not have to be reported on the CRS-1 form:
Electricity Exemption
The use of electricity in the production and transmission of electricity is exempt [7-9-38].
Fuel Exemptions
The use of gasoline or special fuel on which the Gasoline Tax [7-13-3] or Special Fuel Excise Tax [7-16A-3] has been paid and not refunded is exempt [7-9-26].
The use of oil, natural gas, liquid hydrocarbons, or any combination of these as fuel consumed in the pipeline transportation of any of these products is exempt [7-9-37].
Governmental Entity Exemptions
The use of property by the federal government or one of its agencies, or by the state of New Mexico, one of its agencies, or a political subdivision is exempt [7-9-14A] with two exceptions: The use of property by a New Mexico political subdivision that is or will be incorporated into a project created under the Metropolitan Redevelopment Code is not exempt. The use of tangible personal property that becomes an ingredient or component part of a construction project is not exempt.
The use of property on Indian reservations or pueblo grants by the governing body, agency, or subdivision of an Indian nation, tribe, or pueblo is exempt [7-9-14B].
The use of property by any branch of the U.S. Armed Forces engaged in resale activities is exempt [7-9-31].
Not-for-Profit Organization Exemption
The use of property by organizations granted tax exemption under Section 501(c)(3) of the Internal Revenue Code is exempt provided the property is used for purposes described in that section [7-9-15]. There are two exceptions:
1) Property used in an unrelated trade or business as defined in Section 513 of the Internal Revenue Code is not exempt;
2) Property used as an ingredient or component part of a construction project is not exempt.
Personal and Household Effects Exemption
The use of personal or household effects brought into New Mexico by an individual at the time the individual establishes an initial residence in this state is exempt [7-9-27]. This exemption also covers the non-business use of property in New Mexico by a nonresident while temporarily within this state.
Railroad and Aircraft Exemptions
The use of railroad locomotives, trailers, containers, tenders or cars procured or acquired for use in railroad transportation is exempt [7-9-30A].
The use of commercial aircraft bought or leased primarily for use in the transportation of passengers or property for hire in interstate commerce is exempt [7-9-30B].
Vehicles and Boats Exemptions
The use of vehicles on which the motor vehicle excise tax [7-14-3] has been imposed is exempt [7-9-23].
The use of vehicles subject to special registration with the Motor Vehicle Division for disabled persons [66-3-16] is exempt [7-9-23].
The use of boats on which the boat excise tax [66-12-6.1] has been paid is exempt [7-9-23.1].
DEDUCTIONS FROM COMPENSATING TAX
Deductions from compensating tax, unlike deductions from gross receipts tax, do not have to be reported on the CRS-1 form:
Agricultural Implements, Aircraft and Vehicles Deduction
Fifty percent of the value of agricultural implements used by persons regularly engaged in the business of farming or ranching, farm tractors, aircraft not exempted under 7-9-30B, and vehicles not requiring registration under the Motor Vehicle Code may be deducted from the total value before computing compensating tax due [7-9-77A]. Any trade-in deduction must be taken before taking this 50% deduction.
Leasing Deduction
The value of tangible personal property held for lease by a person engaged in the business of selling or leasing the same type of property may be deducted before computing compensating tax due [7-9-78], with three exceptions:
1) The value of furniture or appliances furnished as part of a leased or rented dwelling by the lessor may not be deducted;
2) Coin-operated machines may not be deducted;
3) Manufactured homes may not be deducted.
To be eligible for the leasing deduction, three requirements must be met:
1) The person must be engaged in a business that derives a substantial portion of its receipts from leasing or selling tangible personal property of the type leased;
2) The person cannot use the tangible personal property in any manner other than holding it for lease or sale in the ordinary course of business;
3) The person cannot use the tangible personal property in a manner incidental to the performance of the service.
Trade-in Allowance Deduction
The value of the allowance given to a buyer for the trade-in of the same type of tangible personal property being purchased may be deducted from the value of the property sold before computing compensating tax due [7-9-77B].
CREDITS AGAINST COMPENSATING TAX
The credits below may be applied against compensating tax. For more information on compensating tax credits or other tax credits, refer to the INTRODUCTION TO CRS published once a year in the July-December issue of the CRS-1 Filer's Kit, or to publication FYI-105, Gross Receipts and Compensating Taxes: An Overview.
Tax Paid to Another State Credit
This credit essentially ensures that New Mexico compensating tax is not paid on property for which similar tax has already been paid to another state [7-9-79]. A similar credit exists for services taxed by another state [7-9-79.1].
Amount of credit: The amount of the tax paid to the other state, but not to exceed the amount of compensating tax due on the same property.
How taken: No special form used; record-keeping requirements only.
Construction Credit
A person in the construction business who owes gross receipts tax on the sale of a construction project may take this credit against the gross receipts tax due for compensating tax already paid on the project [7-9-79B].
Amount of credit:
How taken: Computed on the Special Contractor's Report for Compensating Tax Credit (ACD- 31077) and taken on the CRS-1 form.
Investment Credit
Taxpayers who incorporate qualified equipment into a New Mexico manufacturing operation and meet a sliding-scale job creation requirement may claim credit against compensating tax, gross receipts tax or withholding tax [7-9A-1].
Amount of credit: Five percent of the value of the qualified equipment. Once approved, the credit may be taken in an amount not to exceed 85% of the sum of the taxpayer’s gross receipts, compensating and withholding taxes due for the reporting period. Excess credit amounts may be carried forward.
How taken: Apply for approval on the Application for Investment Credit (RPD-41167) within one year of introduction of the qualified equipment. After approval the credit is taken on the Investment Credit Claim form (RPD-41212) and submitted with the CRS-1 form.
Capital Equipment Tax Credit
Telephone call centers locating in or expanding into the rural parts of New Mexico outside Bernalillo, Dona Ana or Santa Fe Counties or five miles beyond Rio Rancho’s exterior boundaries may apply for and receive approval of credits claimed against compensating tax, gross receipts tax or withholding tax due. To qualify, capital equipment must be used for taking inbound calls or recording or processing messages; it must have been purchased on or after July 1, 1999; it must not have been used previously in New Mexico, and the gross receipts or compensating tax must already have been paid on the equipment’s acquisition. If the center closes or the equipment is moved within 48 months of the approved credit, the credit must be repaid [7-9d-1].
Amount of credit: Applied at 5% of the value of the capital equipment. Once approved, the credit may be taken in an amount not to exceed the taxpayer’s gross receipts, compensating and withholding taxes due for the reporting period. Excess credit amounts may be carried forward.
How taken: Apply for approval on the Application for New Mexico Capital Equipment Tax Credit (Form RPD-41220) . Once approved, the credit is taken on the Capital Equipment Tax Credit Claim Form (RPD-41222) and submitted with the CRS-1 form. An annual report of capital equipment purchased is required.
Examples 1 through 5 reflect the first type of transaction described on page 2: when goods that are purchased out of state or by mail for use in New Mexico are not taxed in the state of origin, but would have been subject to gross receipts tax had the sale occurred in New Mexico.
Example 1. A New Mexico pizza parlor purchases pizza ovens from a supplier in Michigan in a transaction that is not subject to Michigan sales tax.
The pizza parlor becomes liable for compensating tax on the value of the pizza ovens plus any freight, delivery, and handling charges included in the seller's billing when the ovens enter New Mexico for use in the pizza parlor.
Example 2. A New Mexico accountant purchases a computer for business use from a mail-order catalog. The vendor is located outside the state of New Mexico and does not charge customers sales tax.
The accountant is liable for the compensating tax on the value of the computer because the computer is used in New Mexico and the transaction would have been subject to gross receipts tax had it taken place in New Mexico.
Example 3. A new restaurant/bar in New Mexico purchases hats and T-shirts from a factory in California. The restaurant will give away these hats and T-shirts as promotional items to the first 100 people to enter the restaurant. No purchase is required to receive a hat or T-shirt. The factory did not charge California tax on the hats and T-shirts to the New Mexico restaurant.
The restaurant is liable for the compensating tax on the value of the hats and shirts because the property is used in New Mexico. Because there is no concurrent purchase required, the items are not being resold in combination with other goods.
Example 4. A New Mexico business owns a special machine for use in its business. The machine breaks, and the only repair shop for this item is in the state of Washington. The machine is shipped to the Washington shop for repair, then shipped back to the New Mexico business after repair.
The repair, a service, would not be subject to compensating tax because the service was performed entirely outside the state of New Mexico. Services performed out of state are not subject to compensating tax.
However, if the repair shop stated the price of repair parts separately from the price of the service, the value of the repair parts would be subject to compensating tax.
Example 5. An attorney subscribes to law journals and trade publications published outside New Mexico to use in the practice of law in New Mexico. The publisher is not subject to New Mexico gross receipts tax and does not charge, collect or pay any sales, gross receipts or similar tax to any other state on the sale to the attorney.
The attorney is liable for compensating tax on the value of the law journals and trade publications.
Examples 6 through 10 reflect the second type of transaction described on page 2: when a business purchases, either in state or out of state, an item or service in a nontaxable exchange (usually by issuing a Nontaxable Transaction Certificate [NTTC] for the purpose of resale) but subsequently uses the item or service for a purpose other than resale; or when a business uses, instead of sells, property it manufactured.
Example 6. A grocery store owner purchases food for resale from suppliers and executes Type 2 NTTCs since the owner will be reselling the food in the ordinary course of business. The owner then supplies his own household with food taken from the inventory of the grocery store.
The grocery store owner becomes liable for compensating tax on the purchase price or cost of the food taken from inventory when the goods are converted to use by the owner.
Example 7. A tavern located in Taos features a free taco bar during happy hour. No concurrent purchase is required to take advantage of the taco bar. The ingredients for the tacos are purchased using NTTCs.
The tavern is liable for the compensating tax on the cost of the taco fixings because the ingredients were purchased using NTTCs and no concurrent purchase was required to partake of the taco bar. Since no purchase is required, the tavern is using the taco bar for promotional purposes. The food is not resold but is converted to the tavern's own use. Therefore, compensating tax is due.
Another tavern in Taos features a free taco bar (also with ingredients purchased using NTTCs) during happy hour, but a drink purchase is required.
Because there is a requirement for a concurrent purchase to get access to the taco bar, the tavern is not subject to compensating tax on the cost of the taco fixings.
Example 8. A mechanic has issued a Type 5 NTTC to a radiator shop. The mechanic has the radiator shop repair the radiator in the mechanic's personal automobile. The radiator shop deducts its receipts from this transaction, since the mechanic had previously issued the Type 5 NTTC, and does not pay gross receipts tax.
The mechanic is liable for the compensating tax on the value of the radiator repair (the amount paid to the radiator shop) since the mechanic did not resell the radiator repair.
Example 9. A dentist purchased dental chairs and equipment for $15,000 five years ago while practicing in Texas. Texas sales tax of 8% was paid on the purchase of the equipment. The dentist moves the practice to New Mexico and brings all of the dental chairs and equipment into New Mexico to use in the practice. The adjusted basis of the used chairs and equipment is $10,000 at the time the dentist moves them into New Mexico.
The dentist is liable for compensating tax on the value of the chairs and equipment at the time the dentist introduces the property into New Mexico. However, since 8% sales tax had been paid to the state of Texas, the dentist can take a credit against the compensating tax for the sales tax paid to Texas. If no tax had been paid to Texas, the dentist would owe New Mexico compensating tax on the $10,000 value at the time of introduction into New Mexico, not the original purchase price.
Example 10. A contractor constructed a new home and moved into the home on its completion. The contractor issued Type 6 NTTCs for the purchase of all materials that were incorporated into the home. The contractor also issued Type 7 NTTCs for the purchase of construction services performed by subcontractors. The total value of materials purchased for the home was $75,000, while the value of subcontract services was $25,000. The contractor paid $5,000 in compensating tax when the home was occupied. A year later the contractor sold the home for $150,000, $25,000 of which was the appraised value of the land.
The contractor owes gross receipts tax on $125,000 since the value of land can be deducted from the gross receipts [7-9-53]. However, the contractor can take a credit against gross receipts tax due for the $5,000 in compensating tax previously paid. The contractor will pay the difference (the gross receipts tax due less the compensating tax previously paid) as gross receipts tax on receipts from the sale of the home.
Example 11 illustrates a business’ responsibility as agent for collection of compensating tax.
Example 11. A Texas furniture company ("company") sells to New Mexico businesses and individuals both at its retail location in El Paso and through salespeople who promote sales of its office furniture line by calling on New Mexico businesses. All deliveries are made via common carrier F.O.B. Texas. The company is an agent for collection of compensating tax on its sales to New Mexico customers for three reasons: 1) the company regularly solicits sales in New Mexico through its salespeople; 2) the company is selling property for use in New Mexico and, 3) the sale of the furniture is not subject to the gross receipts tax because it takes place in Texas.
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