N.M. Code R. § 3.2.1.23

Current through Register Vol. 35, No. 7, April 9, 2024

Section 3.2.1.23 - "PERFORMANCE OF A SERVICE", "PRODUCT OF THE SERVICE", "INITIAL USE", AND "DELIVERY"; PRESUMPTIONS

A. Relationship between certain terms and consistency in use of those terms. The terms "sale of a service performed," "performance of a service," "product of the service," "initial use" and "delivery" are defined or used in the Gross Receipts and Compensating Tax Act and regulations in a way that makes them closely related in their application. The terms are used in Section 7-9-3.5 NMSA 1978, the definition of "gross receipts," to describe gross receipts from performing or selling services that will be subject to tax and in Section 7-9-57 NMSA 1978 to describe a deduction for sales to out-of-state buyers. Regardless of the context in which they are used, or whether the service is performed inside or outside the state, these terms will be interpreted and applied consistently.

B. Delivery and initial use of the product of construction services and construction related services, in-person services, and services which that produce tangible personal property.

(1) The product of a construction service or a construction related service is delivered and initially used in New Mexico if the related construction site is located in New Mexico.

(2) The product of an in-person service is delivered and initially used in New Mexico if the location of the performance of the service is in New Mexico.

(3) The product of a service, the primary purpose of which is to produce tangible personal property, is delivered and initially used in New Mexico if the tangible personal property is delivered to the purchaser or a person designated to receive the property in New Mexico.

C. Delivery and initial use of the product of a service other than construction services, construction related services, in-person services, or services which produce tangible personal property - generally.

(1) As defined under Subsection E of Section 7-9-3 NMSA 1978, "initial use" or "initially used" means the first employment for the intended purpose and expressly excludes the following:

(a) observation of tests conducted by the performer of services;

(b) participation in progress reviews, briefings, consultations and conferences conducted by the performer of services;

(c) review of preliminary drafts, drawings and other materials prepared by the performer of the services;

(d) inspection of preliminary prototypes developed by the performer of services; or

(e) similar activities.

(2) The location of delivery or initial use of the product of a service is determined based on relevant facts and circumstances, including primarily:

(a) The location of the purchaser or the person to whom the service is intended to be delivered.

(b) The terms of the agreement between the parties, as evidenced by any formal writing or documentation as well as the parties' behavior, including, but not limited to, any behavior which constitutes an alteration of the parties' agreement.

(c) The nature of the service and the manner in which similar services are ordinarily delivered and initially used.

(3) The delivery and initial use of the product of a separate service, which is sold with other services or property, will be determined based on the facts and circumstances relating to that separate service. For this purpose, a "separate service" is a service that would be considered a service under 3.2.1.29 NMAC, but may be sold together with property or other services, and which the seller could have sold separately to the buyer, though it was in fact sold as part of a single transaction or contract along with other services or property. Similarly, a single contract may involve services that are to be performed in multiple phases, where each phase may constitute a separate service under 3.2.1.29 NMAC. The delivery and initial use of the product of each separate service, as described in this Paragraph (3), may occur at different locations under the relevant facts and circumstances.

(4) A single or separate service, as that term is used in Paragraph (3) of Subsection C of 3.2.1.23 NMAC may, under all the relevant facts and circumstances, appear to have multiple points of delivery or initial use both inside and outside the state. In particular, this may be the case for services sold to businesses or organizations. If there is a primary location of delivery or initial use, this location will be deemed the location of delivery or initial use for purposes of the Gross Receipts and Compensating Tax Act. The primary location of delivery may be determined by facts and circumstances that show the location of the persons or offices that contracted for or oversee the service or that approve payment of the service or determine if the service has been completed properly. The primary location of initial use may be determined by the primary location of delivery or the place in which the most significant portion of initial use takes place.

D. Presumptions as to delivery and initial use of the product of the service in New Mexico; reliance on purchaser representations. Other than services described in Subsection B, of 3.2.1.23 NMAC, the following presumptions apply to all sales of services unless the seller has information and evidence sufficient to rebut the presumptions:

(1) if the purchaser of the service is an individual, then delivery and initial use of the product of the service are presumed to occur in New Mexico if the seller has information showing a billing address or other primary location for that purchaser in New Mexico;

(2) if the purchaser of the service is a person other than an individual, then delivery and initial use of the product of the service are presumed to occur in New Mexico if that person's domicile or primary place of business or operations is in New Mexico;

(3) if the purchaser of the service is a person other than an individual and the person has its domicile or primary place of business or operations outside New Mexico, then delivery and initial use of the product of the services are presumed to occur in New Mexico if the seller's primary contact for purposes of the contract or the billing address for the services is located in New Mexico; and

(4) in a case where the facts and circumstances demonstrate that delivery of the product of the service occurs in New Mexico, initial use of the product of the service is presumed to occur in New Mexico.

In order to rebut these presumptions, the seller must show that delivery or initial use of the product of the service is not in New Mexico considering the relevant facts and circumstances as generally described in this Subsection C of 3.2.1.23 NMAC. The seller may also rely in good faith on written representations made by the purchaser of the service that the initial use of the service will not be made in New Mexico, provided that the seller has no indication that this representation is untrue.

E. Partial performance of service inside the state If a seller performs services partially inside and outside New Mexico which are delivered in New Mexico but are initially used outside the state, only the portion of the gross receipts from the service performed inside New Mexico will be subject to the gross receipts under Sections 7-9-3.5 and 7-9-57 NMSA 1978. Because the seller delivers the product of the service in New Mexico, the portion of gross receipts from the service performed in the state is not deductible under Section 7-9-57 NMSA 1978. The seller may apportion the gross receipts from the service performed inside and outside the state using the relative direct costs incurred.

F. Change in facts and circumstances during the performance of a service and incomplete services. A change in facts and circumstances during the performance of a service may change the delivery or initial use of the product of a service. Likewise, the failure to complete the performance of a service may change the delivery or initial use of the product of a service.

G. No effect on compensating tax due. The provisions of this regulation apply only to a seller's determination of whether the delivery or initial use of the product of a service are in New Mexico. A purchaser who makes a taxable use of a service in New Mexico may owe the compensating tax even if the seller was not required to pay tax on the gross receipts from the performance or sale of that service.

H. Examples:

(1) A lawyer in New Mexico and her New Mexico client, with a New Mexico billing address, agree that the lawyer will perform the legal service of drafting a will. The lawyer charges for her service on an hourly basis. The lawyer reviews the client's finances and other information. The lawyer completes the will and provides it to the client. After reviewing the will, the client executes the will. Under Subsection D of 3.2.1.23 NMAC, delivery and initial use of the product of the service are presumed to be in New Mexico. Nor would the lawyer be able to rebut these presumptions since, under all the facts and circumstances, delivery of the product of the service occurs in New Mexico when the client receives the draft will from the lawyer and initial use of the product of the service occurs in New Mexico when the client executes the will.

(2) Same facts as in Paragraph (1) of Subsection H of 3.2.1.23 NMAC, except that before the will is finally drafted, the client tells the lawyer she has changed her mind and will not need the will. The lawyer and the client agree that the lawyer will not provide any documentation of advice or a draft of the will based on the work done, even though the client will pay for the hours already worked. As in Paragraph (1) of Subsection D of 3.2.1.23 NMAC, delivery and initial use of the product of the service are presumed to be in New Mexico. Nor would the lawyer be able to rebut this presumption since under the product of this incomplete service is the work done by the lawyer for the client in New Mexico and there are no facts that would rebut the presumption that delivery and initial use of this product occur in New Mexico.

(3) Same facts as in Paragraph (1) of Subsection H of 3.2.1.23 NMAC, except the client is outside New Mexico and the lawyer delivers the will to the client outside New Mexico where the client executes the will. In this case, there is no presumption under Subsection D of 3.2.1.23 NMAC that delivery or initial use of the product of the service is in New Mexico. Under the facts and circumstances, the product of the service, the will, is delivered and initially used outside New Mexico. Therefore, the lawyer will be entitled to a deduction under Section 7-9-57 NMSA 1978 provided the lawyer has evidence required to support the deduction.

(4) Same facts as in Paragraph (1) of Subsection H of 3.2.1.23 NMAC, except the lawyer performs the service outside New Mexico and the lawyer delivers the will to the client in New Mexico, where the client executes the will. As in Paragraph (1) of Subsection D of 3.2.1.23 NMAC, delivery and initial use of the product of the service are presumed to be in New Mexico. Nor would the lawyer be able to rebut this presumption since under the facts and circumstances, the product of the service, the will, is delivered and initially used in New Mexico. Note that while lawyer in this case would have gross receipts subject to tax because the service is initially used in the state, under 3.1.4.13 NMAC, because the service is a professional service, the gross receipts would be sourced to the state reporting location and subject to tax at the state rate.

(5) Same facts as in Paragraph (2) of Subsection H of 3.2.1.23 NMAC except the lawyer is outside New Mexico. As in Paragraph (2) of Subsection D of 3.2.1.23 NMAC, delivery and initial use of the product of the service are presumed to be in New Mexico. In this case, however, the product of this incomplete service is the work done by the lawyer for the client outside New Mexico and the lawyer may, therefore, be able to rebut the presumption that delivery or initial use of this product occurs inside New Mexico. Assuming the lawyer can rebut the presumption and show that initial use of the product of the service occurs outside New Mexico, the lawyer would have no gross receipts subject to tax.

(6) A New Mexico seller agrees to provide a consulting service to a federal government agency, contracting and overseeing the performance of the service at an out-of-state location. The contract for the service provides that the seller is required to prepare a report summarizing the work and deliver that report to the out-of-state location. The contract also provides that the government will use the report to select products for purchase at facilities outside New Mexico. During the contract, the government agency, which has offices in New Mexico, answers questions posed by the New Mexico seller and responds to requests for data. Here, there is no presumption in this case under Subsection D of 3.2.1.23 NMAC that the delivery or initial use of the product of the service are in New Mexico. Furthermore, under all the facts and circumstances, the product of the service, the report, is delivered and initially used outside the state.

(7) A seller performs website design services outside New Mexico for a client that has business locations inside and outside the state. The seller works with and responds to the client's technology manager the client's out-of-state office. The seller and the client agree that the seller will make a demo of the proposed website for the technology manager to test. After the test, the seller will finish the website, with any necessary changes, and will give the client access to operating the website. The operation of the website will be done primarily at offices of the client outside the state, although some operations will also be done in the New Mexico office. Here, there is no presumption under Subsection D of 3.2.1.23 NMAC that the product of the service is delivered or initially used in New Mexico. Furthermore, under all the facts and circumstances, the product of the service, the final website, will be delivered and initially used outside the state.

(8) A seller of medical testing services performed outside New Mexico has a client in New Mexico who purchases the services for its own medical facilities both inside and outside the state. The seller of testing services charges by the test. The results of tests are sent to the client's medical facilities in New Mexico where they are reviewed and then made available to doctors and patients. Each testing service is a separate sale of a service. Here, for each service, the product of the service is presumed to be delivered and initially used in New Mexico under Subsection D of 3.2.1.23 NMAC. The seller in this case will not be able to rebut the presumption because, under the facts and circumstances, the product of these services are the results which are delivered to New Mexico and initially used at facilities where they are reviewed.

(9) A seller of payroll services performed outside New Mexico has a business client which has offices both inside and outside New Mexico. The seller's contact is with the business's headquarters, outside the state, and the seller obtains information to perform the payroll service from the business's chief accountant located in that office. Each pay period, the seller transmits funds electronically drawing on the business's accounts to pay employees and to submit tax returns and also transmits reports to the business at the headquarters office. This information is reviewed by the headquarters office and any mistakes are communicated by the business to the seller. Each year the seller also transmits W-2s and other tax information by mail. Here, there is no presumption under Subsection D of 3.2.1.23 NMAC that the product of the service is delivered or initially used in New Mexico. It may appear that the product of the service is delivered and initially used both in and outside New Mexico. Under Paragraph (4) of Subsection C of 3.2.1.23 NMAC and under all the relevant facts and circumstances, the product of the service, payroll information, is deemed delivered to the primary location of delivery outside the state and the initial use of the product of the service is, likewise, deemed delivered to occur at the primary location of initial use outside the state.

(10) Same facts as the example above, except that the seller of payroll services performs those services in New Mexico. Again, as in the previous, while the product of the service may appear to be delivered and initially used both inside and outside New Mexico, under Paragraph (4) of Subsection C of 3.2.1.23 NMAC and under all the relevant facts and circumstances, the product of the service, payroll information, is deemed delivered to the primary location of delivery outside the state and the initial use of the product of the service is, likewise, deemed to occur at the primary location of initial use outside the state.

(11) A seller of video editing services performed inside New Mexico are sold to an out-of-state customer who posts the edited video on-line for use by its customers throughout the United States. After the edited video is delivered and posted on the customer's website, the customer then asks the seller in New Mexico to test access to the video, and the seller agrees to do so. The fact that the final action related to the service, the testing of the access to the video, occurs in New Mexico does not change the result under all the relevant facts and circumstances that the delivery and initial use of the product of the service, the edited video, occurs outside New Mexico when the video is delivered to and posted by the customer on its website.

(12) Same facts as Paragraph (11) of Subsection H of 3.2.1.23 NMAC except that the seller in New Mexico agrees to both edit the video and provide data from a survey of other websites. The seller charges separately for these services, which it also regularly sells on a separate basis, but the contract and billing information for the two services are combined. These services would be separate services under 3.2.1.29 NMAC and the delivery and initial use of the product of each service would be determined based on the relevant facts and circumstances for each service.

N.M. Code R. § 3.2.1.23

Adopted by New Mexico Register, Volume XXXII, Issue 19, October 13, 2021, eff. 10/13/2021