I was glad to see that the recent consultant’s report, which was done for the state on improving the New Mexico economy, mentions New Mexico is the only state that allows tax pyramiding and its effects on the New Mexico economy need to be evaluated.
I retired in New Mexico to be near my grandchildren four years ago and have found my contacts don’t seem to understand tax pyramiding. Tax pyramiding has two harmful effects: one is that it places a huge cost burden on component manufactures, and second it kills the development of a core community business sector. A core community business sector would be like the development of the advanced manufacturing business in Colorado, where a few pioneering companies led to the creation of dozens of companies, including companies in advanced manufacturers’ supply chains.
I led a component supplier in Minnesota that manufactured diesel particulate filters used in trucks. We sold to companies that manufactured diesel particulate control systems, that sold to diesel truck manufacturers, that then sold to diesel truck users. This is a very typical supply chain, most of which have three or more levels of manufacturers. In every other state, the only company paying sales taxes, or as New Mexico calls it gross receipt taxes (GRT), would be the diesel truck user, the company that uses the product for its own business. Every other company in the supply chain gets a resellers certificate – some states use other equivalent names – which allow the company not to pay sales tax on any item that is used to produce something that is not used by the company. So no tax was due on raw materials or components that were used to produce a product that was eventually sold to another company.
In New Mexico, companies pay gross receipt tax on most items they purchase if used by the company or used to produce a product that is later sold to others, meaning that any component supplier is at a cost disadvantage to a competitor from another state where sales tax is not due on raw material or component purchases. With a long supply chain, tax pyramiding simply raises costs to a noncompetitive level.
I believe there are some exemptions granted by the state for manufacturers to avoid paying gross receipt taxes on items they resell, particularly micro-electronic producers – otherwise Intel probably wouldn’t have a factory in Rio Rancho.
As bad as tax pyramiding is for component manufactures, it has a far worse consequence. It kills the development of a core community business sector. A thriving sector has the manufacturer of the final product which will be sold to an end user working closely with its supply chain to develop new products, and to improve the products they have. In New Mexico, supply chain manufactures can’t thrive because tax pyramiding keeps manufacturers in the supply chain from starting manufacturing here.
If you check our neighbors, they all have core business sectors: Arizona has aerospace, electronics and semi-conductor manufacturing; Colorado has advanced manufacturing, aerospace, bioscience and defense and homeland security electronics; Utah has aerospace and health technology. These sectors give rise to companies that are listed on major stock exchanges. Arizona has 33 public companies with market capitalization of $50 million or more. The Bloomberg Colorado Index lists 60 major stocks, and Utah has 17 listed companies. New Mexico has one, PNM, which is not a manufacturing company.
Former Gov. Susana Martinez tried to get GRT reform on the Legislature’s agenda a few years ago, but nothing has happened with the current administration.
I hope the Legislature takes the consultant’s report to heart and starts to look into why we are the only state in the nation without reseller’s certificates and calculate just how much harm that is doing to our state’s economy.
