New Mexico also taxes most digital services and products. The statewide sales tax rate in New Mexico is 4.88%. Some municipalities in the state apply their own additional sales tax. The average combined rate is 7.62%.
Businesses are required to collect sales tax on New Mexico transactions only if they have nexus in the state or a connection to it (more on nexus later in this article).
What does taxability mean for SaaS?
SaaS is not typically downloaded onto a user’s device. It stays on the provider’s servers or in the cloud, where users access it on a subscription basis (for instance, monthly or yearly). When the subscription ends, users lose access.
Since SaaS is relatively new and isn’t a tangible product, states vary in how they classify it. This can make understanding and staying on top of sales tax difficult for SaaS providers. In addition, states frequently change or update their tax laws — adding another layer of complexity.
Taxation rules in New Mexico
In New Mexico, all SaaS sales are taxable.
As mentioned previously, your company is required to collect sales tax from New Mexico–based customers only if it has nexus in the state. There are two types of nexus: physical and economic.
Your company has physical nexus if it has a physical presence in the state, such as an office, inventory, or employees.
Economic nexus is established if your company earns at least $100,000 in annual revenue from sales to New Mexico–based customers in the previous calendar year. While some states, such as Rhode Island and Hawaii, impose transaction count thresholds alongside revenue thresholds, New Mexico solely uses a revenue threshold, simplifying compliance for smaller software companies.
If you meet any of these criteria, you must collect taxes on sales in the state and remit the funds to the appropriate tax authorities.
There are several types of companies and entities that are exempt from paying the gross receipts tax and sales tax in New Mexico. For example, all departments that are part of New Mexico city or county governments are exempt from sales tax. Public schools are also exempt from these taxes. If you sell your services to Indian Nations or Tribes, those sales are exempt if they occur in the Tribe's territory.
Digital goods
Most digital goods are also subject to tax. This includes streaming video, e-books, and music. If a digital product is transferred through a tangible medium or electronically, you'll need to collect taxes.
Example: How local tax rates may apply
To gain a better understanding of how local tax rates can apply to SaaS transactions, let's say that you own a company that provides businesses with customer relationship management (CRM) software.
If a customer in New Mexico purchases a monthly subscription to your CRM software (and if you have nexus in the state), you'll need to collect sales tax from them when the purchase is made. When an exempted entity purchases your software, you must verify that it is exempt before the sale goes through.
As mentioned before, the base tax rate in New Mexico is 4.88%. However, local districts can also levy a sales tax, which means that the average combined rate is 7.62%. The service's point of use determines whether local taxes will be applied to the transaction.
In Santa Fe, for example, the local rate is 3.31%. In total, $81.90 in sales tax would be charged on a $1,000 SaaS subscription sold to a customer in Santa Fe.
It's highly recommended that you review New Mexico's rules regarding the gross receipts tax to ensure you comply with all existing guidelines.
Navigating compliance
If you sell your software to New Mexico residents or businesses, you could face fines, penalties, and even legal issues if you fail to precisely calculate, collect, and remit the appropriate state and local.
If you have nexus in the state, you must register for a basic sales tax permit. After you receive the permit, start collecting taxes on all SaaS transactions. If you offer other types of digital goods to customers, they should be taxed as well.
Once you begin collecting taxes, it's essential that you file periodic tax returns. Depending on your sales volume, you'll need to file monthly, quarterly, or annually. Make sure that you report your taxable sales and total sales. You'll likely need to pay taxes at the time you file your monthly or annual return. If you don't make these payments on time, your business could be subject to fines.
In New Mexico, the penalty for not filing or remitting taxes is 2% every month. The maximum penalty is 20%, which is why it's highly recommended that you file and pay on time. By understanding your obligations and remaining compliant with New Mexico laws, you'll be able to avoid complications.
While New Mexico doesn't offer voluntary disclosure agreements to companies that already owe sales tax but haven't collected it, you can explore using a managed audit. If you qualify for a managed audit, you'll have 180 days to pay the taxes you owe. During this time, interest won't accrue.
If you no longer wish to sell products in New Mexico, you can effectively close your business in the state with a de-registration. Your business likely has an online administrator account via the Taxation and Revenue Department's website. From here, you can request a business closure.
If you need help staying compliant with New Mexico's complex tax rules, consider using Numeral. This tool can greatly simplify the tax collection and filing process for SaaS providers. The software monitors your sales 24/7 to ensure that the correct tax is collected from every taxable transaction and remitted correctly.
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Additional resources for staying compliant
New Mexico's Taxation and Revenue Department provides businesses and residents alike with ample resources related to the state's tax laws. For example, it's a good idea to use the department website's "News & Alerts" section.
When you navigate to this page, you'll be able to view all recent press releases, which should include any changes to the existing tax laws. The department also maintains a YouTube channel that you can visit to find tutorials and information about business taxes.
You should also visit the "Businesses" section of the website if you need additional help and resources that can assist with compliance. Keep in mind that the department hosts some tax-related workshops throughout the year for businesses.
The bottom line
If you sell SaaS products and digital goods in New Mexico (and have established nexus in the state), you must start collecting and remitting sales tax. The initial rate is 4.88%. However, you'll need to monitor local tax rates as well. By remaining compliant with the latest tax regulations and laws, you can stay compliant and avoid fines. Use the resources the state provides to minimize your mistakes and ensure you remit enough taxes. If you'd like to manage your company's tax situation more efficiently, consider Numeral.
