Online Tax Debate Complicated in New Mexico by Unique Tax Structure(1)

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By Brenna Goth

New Mexico’s tax structure could make expanding tax collection from online companies more complicated than in other states.

The state will have to navigate how to treat in- and out-of-state businesses equally when reacting to the U.S. Supreme Court’s groundbreaking South Dakota v. Wayfairdecision, said Richard D. Pomp, the Alva P. Loiselle professor of law at the University of Connecticut School of Law. Pomp spoke to New Mexico legislators at a tax summit in Santa Fe July 26.

Specifically complex for New Mexico is that the state uses a gross receipts tax, which only a handful of states use at either a statewide or local level. New Mexico’s tax rate varies depending on the location of the business affected, and taxes a company’s gross receipts from, among other things, services performed or property sold in a state.

“You do have this whole other level that has to be thought about,” Pomp said.

The June 21 Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—has many states looking to expand their authority over online sales taxation. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster; the statute imposes a tax collection threshold at 200 transactions or $100,000 in in-state sales.

The 5-4 majority stopped short of formally declaring South Dakota’s law as valid in the absence of Quill, and the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective—it’s expected to do so in mid-August. In the wake of the decision, dozens of states that haven’t already done so are mulling whether to copycat South Dakota’s law. New Mexico for several years has tried unsuccessfully to overhaul and expand its authority over online sellers.

‘More Complicated’

The Wayfair decision focused on ways the South Dakota law appeared to prevent online sales tax collection from burdening businesses. In New Mexico, policymakers will have to consider how to make sure local governments benefit from the revenue and how to apply its gross receipts taxes uniformly to online vendors from e-giant Amazon.com, Inc. to smaller sellers on platforms like Etsy, Inc.

“It’s a little bit more complicated in New Mexico than it might be in a different state,” Pomp said.

Amazon, for example, collects New Mexico state taxes on the sales it makes in the state, but it doesn’t collect local taxes. Legislators have raised that issue in moving forward with remote sales tax collection, considering but failing to enact proposals in two consecutive legislative sessions that would increase the tax collection burdens on marketplaces like Amazon.

Pomp said one option would be to raise the state tax rate with a provision to redistribute revenue to local taxing jurisdictions.

“That would be bulletproof because the Supreme Court doesn’t care what you do with the money,” he said.

Join National Streamlined Group?

One way to help streamline online sales tax collection could be for the state to join the Streamlined Sales and Use Tax Agreement (SSUTA).

Douglas Lindholm, president and executive director of the Council On State Taxation Foundation, suggested the move during the legislative tax summit as a way to simplify the state’s complicated tax system.

“You don’t want to be one of those states where there are challenges and you miss out on additional revenue,” he said.

Legislators suggested considering the move at a future meeting. Joining the SSUTA would require a number of changes to the state’s gross receipts tax system, but it could protect the state from future legal challenges. South Dakota’s adoption of the SSUTA was one of the features of the state’s tax system “that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” the U.S. high court said in Wayfair.

Complex, But Not Impossible

Online tax collections become even more complicated when considering how to tax and enforce compliance with offshore vendors, Pomp said during the legislative summit.

Legislators questioned whether the Wayfair decision would help brick-and-mortar businesses and how to implement laws that could boost state revenue.

“It’s complex in nature but not impossible to achieve,” Sen. Carlos Cisneros (D) said.

To contact the reporter on this story: Brenna Goth in Phoenix at bgoth@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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