New Mexico – Existing Nexus Does Not Make Out-of-State Activities Taxable

SALT Report 1256 – The New Mexico Taxation and Revenue Department ruled that a contractor’s gross receipts from a 3 Phase project that involved researching, developing, building and testing lasers are not taxable. The Contractor is incorporated and has his principle place of business in California but has Nexus with New Mexico.

In the contract it required that the contractor meet specific milestones during the first two phases of the project in order to be considered for Phase 3. Having met the specific milestone in Phases 1 and 2 the contractor was selected to complete Phase 3 which included the design, manufacture, and demonstration of a laboratory-level laser.  All of the work done to complete Phase 1-3, including the initial use, took place in California at the contractor’s facility. At the end of Phase 3, title was passed to the United States Government and the laser was brought into the state of New Mexico and used for further testing.
The New Mexico Taxation and Revenue Department based their decision on the following:
  1. The services the contractor performed in Phases 1-3 were research and development services and the product was the laser, and
  2. The research and development services, along with initial use of the laser took place in California
Therefore, the contractor’s receipts from Phases 1-3 are exempt from gross receipts taxes under Section 7-9-13.1 NMSA 1978 which, “provides an exemption for receipts from all services performed outside New Mexico except the type of research and development services where the product of the service is initially used in New Mexico.”
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