Breaking down New Mexico’s taxes on corporations

Businesses pay a slew of taxes, and it’s not always the most straightforward process.

From gross receipts taxes to unemployment insurance taxes, there’s a lot on employers’ dockets. So how does it all work?

Officials from the New Mexico Taxation and Revenue Department presented to the legislative Revenue Stabilization and Tax Policy Committee on Aug. 23, explaining different tax structures and processes in the state.

The main taxes affecting businesses include gross receipts tax, corporate income tax or personal income tax and unemployment insurance tax. Here’s how the taxes work, according to the presentation.

Gross receipts tax

The largest revenue source to New Mexico’s general fund is the gross receipts tax, or GRT.

Lucinda Sydow, chief economist for the tax department, said it amounted to $4.1 billion in fiscal year 2024.

She explained that GRT in New Mexico is a broad-based tax imposed on the seller, including on goods and services. She said New Mexico is one of the few states that includes services in GRT, and it’s been “very beneficial.”

Lawmakers decreased the state rate to 4.875% in 2022, Sydow said, but there are locally imposed rates on top of that by entities like counties or tribal governments. She said GRT rates range from 4.875% to 9.4375% at Taos Ski Valley, the highest rate in New Mexico.

“So the state rate is competitive, but when you start to put on those local options that can lead to less competitiveness when you compare it to other states,” Sydow said.

The Legislature also in 2022 passed anti-pyramiding GRT deductions, she said, specifically in the manufacturing industry. Pyramiding is taxing business-to-business services and results in multiple layers of taxation, according to the tax department.

Sydow described the compensating tax as a companion to GRT. She said it’s for purchases that are out of state but have a final product used in New Mexico.

Compensating tax is imposed on the purchaser, as opposed to GRT applying to the seller, and is imposed on the value of property.

Sydow said 75% of the tax goes to the general fund, 15% goes to the small cities assistance fund and 10% goes to the small counties assistance fund.

Corporate income tax

New Mexico has a 5.9% flat tax rate for corporations, which is the 28th highest in the nation, according to the tax department.

The gross corporate income tax was about $535 million in fiscal year 2024, including $102 million in film tax credits the state paid out.

Legislative Finance Committee economist Brendon Gray pointed out that the pass-through income tax, which he said is a different tax on pass-through entities, is going to be within the corporate income tax and not in the personal income tax restrictions.

He said reporting methods for corporate income taxes are complicated but important.

Companies can file corporate income tax through worldwide combined reporting, as required by unitary groups and is the default reporting method, through water’s edge combined reporting or through consolidated reporting, Gray said.

Corporate tax also becomes complicated because businesses can operate in more than one state, and New Mexico needs to ensure it receives its own tax. Gray said the way the state does that is by requiring companies to apportion their income based on three factors: property, payroll and sales.

“So they report their total income. They report those three factors. And that's how their tax is identified,” he said.

Personal income tax

Graduated marginal personal income tax ranges from 1.5% to 5.9%, according to the tax department, and the state’s 5.9% cap is moderate compared to other states' personal income tax rates.

Personal income tax generated $2.2 billion in revenue for the state’s general fund in fiscal year 2024.

Campos said young business people are continuously adversely affected by heavier tax burdens. Businesses like sole proprietorships and LLCs can pay personal income tax.

Gray said the state hasn’t made many changes overall to the personal income tax bracket, and the changes in 2024 were the first in a while.

“I think continued progress toward that and then focusing on a specific demographic is certainly within the realm,” Gray said.

Unemployment insurance tax

Employers also pay unemployment insurance taxes, which go to the state’s unemployment trust fund.

How much money is in the fund largely depends on labor market conditions, according to the tax department.

For example, if unemployment claims exceed deposits, the trust fund can reach a deficit the state must replenish it through a higher tax rate or other funding sources. Or, on the other hand, if the taxes in the trust fund exceed claims, the fund balance grows and the state can decrease the tax rate.

The amount of the tax employers’ pay depends on a business’ number of employees, the state-determined taxable wage base per employee, contribution rate based on how many former employees claim unemployment insurance and a multiplier based on the balance of the state’s unemployment trust fund, according to the tax department.

“This is a very important tax in New Mexico levied on employers and is important in times of recession,” Gray said.