SALT Report 2828 – The New Mexico Taxation and Revenue Department issued a ruling regarding the application of gross receipts tax to cloud based applications and services. To provide these services, the Taxpayer licenses the software from a third-party, and sells access to the software to its customers. The Taxpayer charges a monthly fee that is calculated based on the customer’s total usage.
The Taxpayer requested a ruling as to whether the software that it purchases, leases and licenses from a third party qualifies as a purchase for resale, and whether its cloud based services qualify for the exemption for software that is delivered electronically.
In its decision the Department stated that the hardware and software that the Taxpayer purchases, leases and licenses from the third party is purchased, leased, and licensed for use or consumption, and not for resale. Further, the Department ruled that these transactions do not constitute a non-taxable service transaction; instead they are a taxable license to use, as outlined in Section 7-9-3.5 NMSA 1978.
For purposes of the New Mexico gross receipts tax, the law provides that the location of the license is the place where it will normally be exercised. Therefore, if the customer and its computer are located in New Mexico, the location of the license is in New Mexico and is subject to tax.
Conversely, the cloud-based applications qualify as an electronic transfer of software and are exempt pursuant section 7-9-7(C) NMSA 1978.
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