Doing Business in Rio Rancho

Taxation

Compensating Tax

New Mexico’s Compensating Tax is an excise tax imposed on persons using property or services in New Mexico as and is designed to protect New Mexico businesses from unfair competition from out-of state businesses not subject to New Mexico’s gross receipts tax.

The following property is subject to compensating tax:

1. Property that was acquired outside New Mexico for use in this state, if the sale of the property would have been taxable had it occurred in New Mexico.

2. Property that was acquired in a nontaxable transaction but subsequently was converted to use by the person instead of being used in a nontaxable manner.

3. Services that were acquired in a nontaxable transaction but subsequently were converted to use instead of being used in a nontaxable manner are subject to the compensating tax (7-9-7).

The compensating tax rate is 5 percent 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 use, whichever is later. The value of tangible personal property is the adjusted basis of the property for federal income tax purposes determined as of the time of acquisition or introduction into this state or of conversion to use, whichever is later. If no adjusted basis for federal income tax purposes is established for the property, a reasonable value of the property shall be used (7-9-7). The value of services is the total amount of money or other consideration paid for the service unless the reasonable value is greater than the actual amount paid, in which case value would be the reasonable value (7-9-8).

Unlike New Mexico’s gross receipts tax, liability for compensating tax rests with the buyer or user rather than the seller. The buyer has met the tax obligation, however, if the buyer paid compensating tax to a seller who is an agent for the collection of compensating tax. The compensating tax must be separately stated on the invoice to verify payment (7-9-9).

For more information, see NMTRD free publication Gross Receipts and Compensating Taxes: An Overview (FYI-105) and Compensating Tax (FYI-230) available for download at www.state.nm.us/tax.