News & Insights

No Gross Receipts Tax Due on Leases Consummated Outside New Mexico

Tax Development Aug 11, 2016

In a recent decision, a New Mexico administrative hearing officer ruled that a lessor was entitled to a refund of New Mexico gross receipts tax on lease payments received for equipment leased in Texas and later used by the lessee in New Mexico. The lease agreements were executed in Lubbock, Texas, and the lessee picked up the equipment in Lubbock and used the equipment in the Permian Basin, which is in Texas and New Mexico.

The lessor apportioned the lease payments based on its knowledge of the lessee’s use of the equipment and remitted New Mexico gross receipts tax based on the apportioned payments. When Texas audited the lessor, the auditor assessed Texas sales tax on the total lease payments as provided by Texas’s regulation on leases, 34 TAC Sec. 3.294. The New Mexico Department of Taxation (“Department”) denied the lessor’s request for a refund of the gross receipts taxes paid on the same lease payments.

Ruling in favor of the lessor and granting a refund of the taxes, the hearing officer explained that because the orders were placed in Texas, the lessee took possession of the equipment in Texas, and the agreements were finalized in Texas, the taxable transaction took place in Texas. The receipts from leases or sales that take place in Texas are not subject to New Mexico’s gross receipts tax. If, however, the lessor had delivered the equipment to the lessee in New Mexico, the lessor would owe gross receipts tax on the lease payments as provided in NMAC Regulation 3.2.1.17. In addition, the lessee may owe compensating use tax on the lease payments after taking credit for Texas sales tax paid to the lessor on the lease payments.   

TECHNICAL INFORMATION CONTACT:
Adina Christian
Director
Ryan
512.960.1148
adina.christian@ryan.com