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STARTING AND OPERATING A BUSINESS IN NEW MEXICO Copyright © 2008, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION New Mexico has a fairly typical tax and legal structure under which businesses must operate, except for its very pervasive gross receipts tax, which is like a sales tax but applies to almost every economic activity, including most kinds of services. Income and franchise tax rates on corporations are relatively low, and state government regulation tends to be somewhat less intrusive than in many states. For example, there is no fictitious business name law requiring any filing in New Mexico and the state has repealed its bulk sale law that formerly applied to a purchase of an existing business or a large part of its assets. Like most states, New Mexico imposes an income tax, a sales and use tax (called the gross receipts tax), various excise and mineral severance taxes, with property taxes imposed at the local level. It also imposes a franchise tax on corporations, but this was reduced a few years ago to a small annual tax of $50. The state has adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in New Mexico in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. In 2003, the state legislature enacted major cuts in the New Mexico individual income tax. Under these cuts, the maximum tax rate was reduced from 7.9% in 2002 to 7.7% in 2003, 6.8% in 2004, 6% in 2005, 5.3% in 2006, and 4.9% in 2007 and later years. However, in early 2005 the tax cuts for 2006 and 2007 were delayed, so that the top rates were changed to 5.8% in 2006, 5.3% in 2007, and 4.9% in 2008 and thereafter. As the state budgetary situation improved later in 2005, the legislature acted again and reinstated the 5.3% maximum rate for 2006. New Mexico's economic climate, like much of the nation, was impacted by the bursting of the "dot-com" bubble in the stock market in 2000 and the events and aftermath of 9/11/2001. While the state's economy has been slowly recovering, it had lagged behind the economic recovery in much of the rest of the country until recently. However, employment growth has picked up rapidly in the last two years and the New Mexico unemployment rate fell to a record low level of 3.1% by January, 2008. By June, 2008, however, the state's unemployment rate had risen somewhat, to 3.9% (up slightly from 3.5% a year earlier and 5.3% just two years earlier) but remained well below the national rate of 5.7% for June, 2008. To view the latest federal Bureau of Labor Statistics unemployment rate data for New Mexico or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in New Mexico can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. New Mexico also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC, provided that certain liability insurance requirements, discussed below, are met. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in New Mexico can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, almost any business of any size operating in New Mexico will be subject to the New Mexico gross receipts tax, which is similar to a sales tax, and must register for this tax and a New Mexico Business Tax Identification Number, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the New Mexico income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the New Mexico income tax and filing requirements for individuals. Doing business as a sole proprietor in New Mexico is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. (c) Partnerships. New Mexico's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). New Mexico has adopted the Uniform Partnership Act, whose provisions went into effect on July 1, 1997. As discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in New Mexico. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are not generally required to file an annual tax returns with the state. However, as "pass-through" entities, all partnerships (and LLC's) must file a special Pass-Through Entity information return with the state. For details on New Mexico tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in New Mexico can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Under the New Mexico Uniform Partnership Act, a partnership is allowed (but not required) to file a "statement of partnership authority" with the secretary of state, listing information about the partnership and its partners, including, if desired, a statement as to which partners have been granted authority by the partnership to enter into real estate transactions or other transactions on behalf of the partnership. The statement expires after 5 years, if not renewed. There is a $50 filing fee for filing a statement of partnership authority. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under New Mexico law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in New Mexico, and must pay a registration fee of $100. New Mexico has recently enacted a new Uniform Revised Limited Partnership Act, which is generally effective on January 1, 2009, or to limited partnerships formed on or after January 1, 2008. For more information on limited partnership filing requirements, see the contact information for the offices of the New Mexico Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of New Mexico. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and New Mexico state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. However, becoming an LLP will not affect the liability of a partner in an LLP for his or her own omissions, negligence, wrongful acts, misconduct or malpractice or that of any person under his or her direct supervision and control. To form an LLP in New Mexico, you must register your domestic or foreign partnership with the New Mexico Secretary of State and pay a filing fee of $50. Every LLP in New Mexico is required to maintain at least $500,000 per occurrence and $1,000,000 in the aggregate, of liability insurance, beyond any applicable deductible. Every LLP doing business in New Mexico, which includes both domestic and foreign LLP's, must regularly renew its registration and file an annual report in order to retain LLP status. There is a $50 annual report filing fee. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides New Mexico, is that a few states, namely California and New York, only allow certain types of professional service firms to operate in LLP form. (d) Corporations. To form a corporation in New Mexico, you must file articles of incorporation with the Public Regulation Commission and pay a fee based on the number of authorized shares of stock of the corporation. The fee is $1.00 per 1,000 shares, with a minimum fee of $100 and a maximum fee of $1,000. PLANNING POINT: A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in New Mexico, by filing an application for a certificate of authority and paying a filing fee that is the same as for a domestic corporation, except that the minimum fee is $200 for a foreign corporation. For more information on filing articles of incorporation or applying for a certificate of authority to do business in New Mexico, see the contact information for the offices of the Public Regulation Commission, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file a biennial report and a filing fee of $25 with the Public Regulation Commission within 30 days after it is formed (or after obtaining a certificate of authority, in the case of a foreign corporation, and additional reports thereafter every two years, within 2 1/2 months after the end of its taxable year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter, in addition to a $200 late filing penalty. In addition to paying federal income taxes on its income, a corporation that does business in New Mexico must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Corporations that do business in New Mexico are subject to a small annual corporate franchise tax, as described in Section IV(c), which is paid with the annual corporate income tax return. For tax forms and more information on corporate income and franchise taxes in New Mexico, see the contact information for the offices of the New Mexico Taxation and Revenue Department, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. New Mexico recognizes S corporations for state income tax purposes, and treats them in a manner similar to the federal tax treatment. An S corporation with income sources from, or registered to do business in, New Mexico must withhold and pay over state income tax for nonresident shareholders who have not filed an agreement with the state to report their income and pay the New Mexico state income tax thereon. (f) Limited Liability Companies. New Mexico, like every other state, has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in New Mexico may also choose to operate in the form of an LLC. LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes, and in most states, including New Mexico. See Section IV(c) for a discussion of the income tax requirements for LLC's under New Mexico's tax laws. To form an LLC under the laws of New Mexico, one or more persons must file articles of organization with the New Mexico Public Regulation Commission, which must be accompanied by a filing fee of $50. New Mexico law was amended in 1999 to permit one-member LLC's. The articles of organization, Form DLLC, must specify if the LLC is to be a single-member LLC. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in New Mexico, by filing an application for a certificate of authority with Public Regulation Commission and paying a filing fee of $100. Unlike a corporation or LLP, an LLC is not required to file annual or biennial reports. However, if it changes its registered office or registered agent in the state of New Mexico, an LLC must notify the Public Regulation Commission by filing a Statement of Change of Registered Office or Registered Agent, along with a $20 fee. For more information on filing articles of organization for an LLC, see the contact information for the offices of the New Mexico Public Regulation Commission, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that is favorable to you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as gross receipts (sales) tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Bulk sale or bulk transfer laws were almost universal until a few years ago, when many states decided such laws provided little real protection to the creditors of the selling businesses, but added significant legal and other costs for both buyer and seller in business sale transactions. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. All these requirements made the transfer of a business a more arduous and expensive process. Thus, in just a few years, a large majority of states have either repealed or drastically curtailed the coverage of their bulk sale laws. New Mexico is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in New Mexico. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In New Mexico, you should obtain a tax release for gross receipts taxes, by filing a written request on Form ACD-31096 with the New Mexico Taxation and Revenue Department in advance of the transaction. They are required to respond within 30 days, or 30 days after the seller's records are made available for audit, if later, but not later than 60 days after the date of the request, in any event. The Department then will issue a certificate, telling you how much, if any, of the sales price proceeds you must withhold and pay over. If the Department should fail to issue a notice within the time required, you may proceed with the transaction without withholding any gross receipts tax on behalf of the seller. IMPORTANT NOTE: With regard to state unemployment taxes, you should also seek to find out if the seller is current on all such tax payments and must also notify the New Mexico Department of Workforce Solutions (formerly the Department of Labor, until July 1, 2007) in writing by registered mail at least five days before the business is purchased. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the New Mexico Department of Workforce Solutions, requesting that you be treated as a successor employer. Where you have acquired only part of a business and its employees, and seek a partial transfer of the seller's experience rating, file New Mexico Department of Workforce Solutions Form ES-963A. The seller must agree to and join in the application for a partial transfer. PLANNING POINT: EXAMPLE: IV. NEW MEXICO TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
The system of taxation in New Mexico is generally fairly favorable
to business, although individual income tax rates have been
relatively high, but have been significantly reduced in recent
years. Also, the gross receipts tax (New Mexico's equivalent of a
sales tax) is much broader and more pervasive in its scope than
the sales taxes imposed by any other state, except possibly for
Hawaii, as the New Mexico tax applies to almost every imaginable
economic activity. In addition, the gross receipts tax is often
"pyramided" when businesses make purchases of goods or services
from other businesses who have to pay the tax, raising the cost
to the purchasing business, which then has to collect gross
receipts tax on its revenues. In recent years, the governor has
asked the legislature to amend the law to ameliorate this
pyramiding effect, but thus far the legislature has been
unwilling to give up this source of tax revenue.
On the other hand, corporate tax rates on up to $500,000
of taxable income are quite low, there is no property tax on
business inventories, generally, no property tax on intangible
assets, and no recording or conveyance tax on real estate
transactions. While there is an annual franchise tax on
corporations, it is minimal compared to the franchise taxes
imposed by many other states.
NEW MEXICO TELEMARKETING LAW
New Mexico has a law,
similar to federal law, that imposes a number of
restrictions on telephone solicitations by
businesses, including prohibitions against:
New Mexico law also makes it illegal to send unsolicited
e-mail solicitations ("SPAM") or fax solicitations, unless
a number of requirements are met. This law allows recipients
of such illegally sent solicitations to sue for actual
damages or statutory damages of $25 per message or $5,000
per day of violation, plus recovery of court costs and
attorney fees, if the recipient has notified the sender to
stop sending such messages, but the sender continues to do so.
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some
kind. In most cases, this will be a local license, issued by
your city or county. Before you open your business, contact
your local city or county hall and find out if your particular
business needs one or more local licenses. Most kinds of local
business licenses are granted upon payment of a fee, with no
further requirements, except possibly for annual or other
periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and, of course,
any construction or improvements to an existing structure
will almost always require a building permit. Even if you
intend to simply operate your business from your home, you
may be in violation of local zoning requirements, but this
is less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house on
business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, New Mexico has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
For help with state licensing and business registration
requirements in New Mexico, see the contact information for
the offices of the Office of the Superintendent, New Mexico
Department of Regulation and Licensing, listed in
Section VI(a).
To register for gross receipts (sales and use) tax,
employer wage withholding and other state taxes, contact
the New Mexico Taxation and Revenue Department at the
address listed in Section VI(a).
(c) Income and Franchise Taxes.
New Mexico has both an individual income tax and a corporate
income tax, as well as a small franchise tax on corporations.
Unlike many states, it does not impose an annual tax on the
capital of corporations.
For state tax forms and tax information, see the contact
information for the New Mexico Department of Taxation and
Revenue in Section VI(a).
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The New Mexico individual income tax was imposed at a
maximum tax rate of 5.3% in 2006 and 2007 (reduced from 5.7% in
2005) on taxable income in excess of $24,000, for married taxpayers
filing jointly or for a head of household (or over $16,000 for
a single taxpayer). Head of household status as a separate tax
bracket disappeared in 2006, so beginning with 2006 returns,
heads of household pay New Mexico income tax at married-joint
filer tax rates.
The maximum tax rate has dropped further to 4.9% in 2008
and later years. A previously scheduled reduction to 5.3% in
2006 was postponed, but then reinstated by the legislature
in late 2005. The scheduled reduction in the maximum tax rate
to 4.9% in 2007 was postponed to 2008.
Individual taxpayers must generally pay state income tax
on their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such as
a partnership, S corporation or LLC. The New Mexico personal
income tax return is Form PIT-1, which must
be filed with the New Mexico Taxation and Revenue Department
by April 15th each year for the preceding calendar year.
While this probably will not apply to you, New Mexico's
personal income law contains an interesting total exemption
for centenarians. Since January 1, 2002, anyone aged 100 or
older, who is not claimed as a dependent by anyone else, is
completely exempted from New Mexico income tax.
Partnerships, or entities taxable as partnerships, such
as LLC's, are not subject to state income taxation in New
Mexico. However, partners (or members of an LLC) must report
their respective shares of taxable income on their individual
state income tax returns. All pass-through entities are
required to file annual information returns, showing how much
income is allocable to each partner or member, on Form
PTE.
Since 1999, all pass-through entities (including
partnerships, S corporations and LLC's) that have nonresident
partners or owners must withhold New Mexico income tax
equal to the nonresidents' share of the business income,
multiplied by a tax withholding rate percentage that depends
on whether the taxpayer is an individual or a corporation.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income
from the business, will generally be required to make
advance payments of estimated New Mexico individual income
taxes. Estimated tax payments are only required if the
net tax liability (not covered by income tax withholding)
exceeds $500. Estimated tax payments are due in four
installments, on the 15th day of the 4th, 6th, and 9th
months of the taxable year, and the 15th day of the
first month of the following year.
To avoid penalties for underpayment of estimated tax,
you must either pay in 90% of the current year's tax, or
100% of the previous year's tax.
The New Mexico corporate income tax rate, on corporations
other than S corporations, is a graduated tax, with a top
tax rate of 7.6% on income over $1 million. However, most
small businesses will pay a lower rate, since the tax rate
on the first $500,000 of taxable income is only 4.8%. The
tax rate on income between $500,000 and $1 million is 6.4%.
Certain qualified corporations may instead pay an alternate
tax based on 3/4 of 1% of New Mexico sales, if they have no
more than $100,000 in annual in-state sales.
All corporations doing business within the state must
also pay an annual $50 franchise tax, which is paid with
the corporate income tax return.
In addition, there is a one-time tax on capital, imposed
only when a corporation is formed in New Mexico or a foreign
corporation applies for a certificate of authority to do
business in New Mexico, or when a corporation increases the
number of its shares of authorized stock. This tax or fee
is imposed at the rate of $1.00 for each 1,000 shares of
authorized stock, with a minimum fee of $100 ($200 for a
foreign corporation) and a maximum of $1,000.
The state corporation income tax return is Form
CIT-1 (or Form PTE for S corporations
and other pass-through entities), which must be filed with the
Taxation and Revenue Department by the 15th day of the third
month following the end of the taxable year, or by March 15th
in the case of a corporation whose taxable year is the calendar
year.
Corporations are required to make estimated tax payments of
their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $5,000.
Estimated tax payments are due in advance, in four equal
installments, on the 15th day of the 6th, 9th, and 12th
months of the taxable year and on the tax return due date
(the 15th day of the 3rd month of the following year).
The total estimated tax that must be paid in is usually equal
to 80% of the actual tax liability for the year. However,
if the preceding year was a full year of 12 months, the
current year payments need only be equal to 100% of the
prior year's tax liability, except that if the prior year
return has not yet been filed when the first quarter estimate
is filed, the corporation may base its current year estimates
on 110% of the tax liability for the second preceding year.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
S corporations are not subject to the corporate income
tax, but as "pass-through entities," must withhold tax with
respect to nonresident shareholders and file Form PTE.
All S corporations must pay the annual $50 franchise tax.
TAXATION OF LIMITED LIABILITY COMPANIES
In New Mexico, a limited liability company (LLC) is taxed
in the same manner as a partnership, thus avoiding the
possible double taxation of income that can occur with a
corporation. New Mexico law was amended in 1998 to permit
the formation of a one-owner LLC, effective on or after
July 1, 1998. Subsequent clarifying legislation made it
clear that the LLC's articles of organization must specify
whether it is a one-owner LLC.
A one-owner LLC will be treated as a sole proprietorship
under New Mexico tax laws, if it is so treated for federal
tax purposes.
While LLC's are not subject to the corporate income tax
unless they have elected to be treated as corporations for
federal tax purposes, an LLC with nonresident members must
generally withhold state income tax with respect to those
members' shares of the LLC's taxable income from New Mexico sources.
Note that it was not always entirely clear whether an LLC was
a "single-member LLC" or not, in a community property state like
New Mexico, where the "single owner" is a married person and the LLC
is owned as community property. Fortunately, the federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, stating that the IRS will accept whatever choice
the couple make, either to disregard the LLC as an entity (treating
it as a "single-member LLC") or to treat it as a partnership between
the husband and wife. Presumably, the couple's choice of federal tax
treatment will also apply for state tax purposes, since New Mexico
follows the federal tax treatment of LLC's, generally.
However, where the LLC is owned by a husband and wife as joint
tenants, or tenants in common, or as tenants by the entirety,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife
as co-tenants, rather than as community property, whether New
Mexico would treat the LLC as a single-member LLC or as a
partnership of the husband and wife. (However, any such property
held in co-tenancy is likely to soon become community property,
at least in part, so this is an issue that is unlikely to
arise in New Mexico.)
New Mexico tax laws require LLC's that are taxable
as partnerships to file an annual information return,
Form PTE, by the 15th day of the 4th
month after the end of the taxable year (April 15th, if
using a calendar tax year). A single-member LLC does not
file a state tax return -- the owner instead reports the
income or loss from the LLC on his or her New Mexico
individual income tax return, Form PIT-1.
LLC's are not subject to the state franchise tax, unless
they have elected to be treated as corporations for federal
income tax purposes.
(d) Sales and Use (Gross Receipts) Tax.
New Mexico imposes a general sales tax, called the gross receipts
tax, on retail sales of tangible personal property, services,
rentals, and many other types of transactions, at the statewide
rate of 5%. In addition, local governments are allowed to adopt
local gross receipts taxes, at varying tax rates. The combined
rate generally ranges from under 6% to over 8% in different
parts of the state (6.75% in Albuquerque and 7.9375% in Santa
Fe, for the second half of 2008). Rates are scheduled to drop
in most parts of Santa Fe County on January 1, 2009, from 6.625%
to 6.375%.
The New Mexico gross receipts tax, which fully applies to services,
is much broader in scope than the sales taxes imposed by most other
states, other than Hawaii. While there is a limited resale exemption,
most sales of services to other businesses are subject to tax,
resulting in a considerable pyramiding of the tax.
Under the gross receipts tax, "gross receipts" is defined as
money or other consideration received from any of the following:
The gross receipts tax law defines "property" as including
real property, tangible personal property, licenses, and
franchises. On or after July 1, 2006, "property" does not
include patents, trademarks, or copyrights.
Because of the wide application of the gross receipts tax,
almost every kind of business in New Mexico will be subject to
this very broad tax, so you need to be sure to register with the
Taxation and Revenue Department before, or immediately after,
you begin any type of business or occupation in New Mexico.
Ignorance of the tax law was held to be no excuse for failure
to pay tax.
OUCH!
Sellers are required to obtain a seller's permit and to
collect and pay over the state and local gross receipts
taxes to the New Mexico Taxation and Revenue Department.
Businesses are generally required to file monthly returns
on Form CRS-1, which is used to report the
gross receipts tax and, if applicable, state income tax
withheld from wages.
Major exemptions from the gross receipts tax include wages,
salaries and commissions paid to employees; receipts of
growers, producers, or nonprofit associations from selling
livestock, poultry and unprocessed agricultural products;
interest or dividend income; receipts from sales of stocks,
bonds or other securities; and receipts from the sale or
leasing of oil, natural gas, or mineral interests.
The gross receipts tax also does not apply to certain vehicle
lessors, who are instead subject to a flat 5% tax plus $2 a day
surcharge on car rentals, under the Leased Vehicle Gross Receipts Act.
Rentals of real estate, other than hotel or motel accommodations,
sales of real estate, and sales of most intangible property are
also deductible from taxable gross receipts and thus not subject
to gross receipts tax.
Since January 1, 2005, receipts from the sale of food at
a retail food store are deductible, and thus not subject to
the gross receipts tax. Tax still applies to food sold in
restaurants and prepared hot foods that are sold for immediate
consumption. Not all retail stores that sell food are
considered "retail food stores."
In order to pay for the lost gross receipts tax revenues, the
0.5% municipal gross receipts tax credit was repealed and is
no longer allowed as a credit against the state gross receipts
tax, effective January 1, 2005.
However, this lost benefit was restored, to a limited
extent, as of July 1, 2005, but only for those businesses
that sell services for resale, where the buyer is not
subject to gross receipts tax on the resale of such
services. The tax credit is 0.5% of the eligible sales
of services for resale if a business is located in an
unincorporated area, or is 0.3775% if it is located within
a municipality. To qualify for this credit, the seller must
obtain from the buyer a signed copy of Form RPD-41305,
Declaration of Services Purchased for Resale.
Also effective since January 1, 2005, a limited medical
services deduction from gross receipts tax was enacted. This
deduction does not apply to payments by patients to doctors.
Instead, it applies only to services rendered by medical
professionals where they are paid by HMO's or certain other
health insurance providers. Prepaid dental plans are included
in this exemption.
The New Mexico gross receipts tax also allows deductions
for various Internet services, including:
Sales of various goods and services for resale are usually deductible from the gross receipts tax base, if the buyer gives the seller the appropriate type of Nontaxable Transaction Certificate. Previously, there was a one-time fee of $100 for a buyer or lessee who sought permission to execute a Nontaxable Transaction Certificate, but this fee is no longer required. A shadow tax, the compensating use tax, is also imposed at the same rate as the gross receipts tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within New Mexico. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold and may apply to tangible personal property that is manufactured by a person and used by that person in New Mexico. Before starting a business, you will need to register with the Taxation and Revenue Department on Form ACD-31015, Application for Business Tax Identification Number. For more information on New Mexico gross receipts tax registration and compliance, see contact information for the offices of the New Mexico Taxation and Revenue Department in Section VI(a). (e) Real and Personal Property Taxes. In New Mexico, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. New Mexico also imposes personal property taxes on certain types of tangible personal property, including any kind of such property on which the owner has claimed a depreciation deduction for federal income tax purposes, generally. ("Personal property" is any kind of property that is not real estate.) However, most other kinds of business personal property, such as business inventories (other than livestock or manufactured homes), are exempt from personal property tax in New Mexico, with a few limited exceptions. While New Mexico taxes some tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. (f) Other Business Taxes. New Mexico imposes a number of excise and other taxes on businesses, including:
Unlike most states, New Mexico does not impose a tax on real estate recording or conveyances or a tax on the capital of corporations. (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. New Mexico has a rather informal and relaxed business regulatory climate, and registration of fictitious or assumed business names is not required in this state, generally. However, under the 1999 Public Accountancy Act, effective until July 1, 2012, a person engaged in the practice of accounting may not use a business name that includes "company," "and company," or a similar designation unless the person is a "firm" (public accounting firm), as defined in the 1999 Public Accountancy Act, and has more than one partner, shareholder or member and the business name contains the name of at least one current or former partner, shareholder or member. An accounting firm's business name may contain only the name or initials of a present or former partner, shareholder or member and the words "and company" or "company" or a similar designation or abbreviation. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. Once you hire the first employee in your business, your life becomes a great deal more complicated. Federal and state laws pile a long laundry list of responsibilities on the back of anyone who hires employees. One of the first things you will need to be concerned about as a new employer is the requirement that you withhold personal income taxes from the wages of your employees. As an employer, you are responsible for withholding the taxes and paying them over to the government on behalf of the employee. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since New Mexico imposes a state income tax on the income of individuals, you will need to also withhold New Mexico income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the New Mexico Taxation and Revenue Department on Form ACD-31015, which also serves as registration for state and local gross receipts and compensating use tax, cigarette, gasoline and certain other state taxes. Withheld income tax, gross receipts tax and certain other taxes are all paid over to the state on a monthly basis, on the 25th of the following month, together with the Combined Report, Form CRS-1. For more information on New Mexico income tax withholding and registration requirements for employers, see the contact information for the offices of the New Mexico Taxation and Revenue Department, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $450 in any calendar quarter, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Every new business that starts up in New Mexico, whether or not it has employees, is required to file Form ES-802, Report to Determine Liability, so that the Employment Security Division of the New Mexico Department of Workforce Solutions can determine whether or not you are subject to the state unemployment tax. If your business is subject to the New Mexico unemployment tax, you may want to request a copy of the book Employer Responsibilities Under the Unemployment Compensation Law of New Mexico (7/2007) from the New Mexico Department of Workforce Solutions. Employers are required to post an unemployment insurance poster in the workplace, which is issued to you by the New Mexico Department of Workforce Solutions, Employment Security Division, when you register for unemployment tax. New employers are required to pay tax at a rate of 2.0% in 2008 on the first $19,900 of wages paid to each employee. This is a reduction from the 2.7% rate that had applied until recently. After you have had employees for at least 16 calendar quarters, you will have developed an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under New Mexico law, cannot be charged to your employees or withheld from their wages. For more information on your New Mexico unemployment tax obligations as an employer, see the contact information for the offices of the Unemployment Insurance Bureau, part of the Employment Security Division of the New Mexico Department of Workforce Solutions, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. States that require workers' compensation coverage also generally allow some companies that can demonstrate sufficient financial resources to self-insure, in lieu of purchasing such insurance from state-operated or private insurers. However, as a practical matter, most small businesses with employees will have to obtain workers' compensation insurance coverage, as few, if any, small firms will have the financial wherewithal to obtain state permission to self-insure. While workers' compensation insurance is generally required (in most states) for small employers, such coverage is legally required in New Mexico only for employers with 3 or more employees. However, no such exemption is allowed for businesses subject to the Construction Industries Licensing Act, regardless of the number of employees. Exempt employers may, if so desired, elect workers' compensation coverage. Certain types of employees are not required to be covered by workers' compensation, including domestic servants or farm and ranch workers. Sole proprietors and certain executive employees of a corporation or LLC may elect to be excluded from workers' compensation coverage. "Executive employees" are executive officers who own 10% or more of the stock of the corporation or a 10% or greater interest in an LLC. IMPORTANT NOTE: Individuals who are not considered to be "employees," such as "qualified real estate salespersons" (as defined), are also generally exempted from coverage. A "qualified real estate salesperson" is someone who meets all the following requirements:
If your business is subject to the Workers' Compensation Act, you must direct your insurance company to file a certificate of workers' compensation coverage with the insurance commissioner. There is no longer a filing fee. Note that in New Mexico, every employer subject to the Workers' Compensation Act who has an annual workers' compensation insurance premium of $5,000 or more (or who self-insures) is subject to an annual safety inspection. Firms subject to the Workers' Compensation Act must post an official workers' compensation poster in the workplace. There are potentially severe legal consequences for failure to display this poster. Obtain copies of the poster from the state Workers' Compensation Administration. Employers in New Mexico who have covered employees are also subject to a special workers' compensation tax, based on the number of covered employees, and must register separately for it with the Taxation and Revenue Department. The Personnel Assessment Fee is paid quarterly, with Form WC-1, to the Taxation and Revenue Department. This tax is imposed at the rate of $4.30 per covered employee per calendar quarter and is divided between employer and employee, with the employer paying $2.30 and the employee $2.00 each quarter. This tax or fee is separate from, and in addition to, any workers' compensation insurance premiums you must pay as an employer. CAUTION: Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees, even if you are not legally required to do so. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. For more detailed information regarding your obligations as an employer under the New Mexico workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Administration, listed in Section VI(a). For information regarding registration for and payment of the workers' compensation tax, contact the Taxation and Revenue Department at the address listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the New Mexico wage-hour laws, which provide for a state minimum hourly wage that was $5.15 an hour in 2007, which was lower than the federal minimum wage, the latter having increased to $5.85 an hour on July 24, 2007. However, recent legislation (SB 324) increased New Mexico's state minimum wage to $6.50 an hour on January 1, 2008 and to $7.50 an hour on January 1, 2009. IMPORTANT NOTE: Under New Mexico's labor laws, employees must be paid for overtime worked at a rate of one and one-half times their regular hourly rate, for all hours worked in excess of 40 hours per week. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the New Mexico wage-hour rules. The New Mexico law also exempts foremen, supervisors, and superintendents, as well as salespersons or employees who are paid on piecework, flat rate schedules, or on a commission basis. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Labor and Industrial Division of the New Mexico Department of Workforce Solutions. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in New Mexico. In general, New Mexico child labor laws forbid employment of children under the age of 14, except for child performers, where required permits are obtained. (The former exemption for newspaper delivery was repealed in 2007.) Children between the ages of 14 and 16 are not permitted to work:
Children 14 or 15 years old may not work more than 18 hours a week when school is in session, or 40 hours a week when it is not. Children under 18 are prohibited from working underground in mines, quarries, or at any place where explosives are used. Child labor permits are issued by school superintendents or principals and are valid for one year only. For more information on New Mexico wage/hour and child labor laws, contact the New Mexico Department of Workforce Solutions, which was formerly the New Mexico Department of Labor, at the address listed for that agency in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. New Mexico is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and New Mexico job safety requirements, you may wish to contact the Occupational Health and Safety Bureau, part of the New Mexico Environment Department, and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Santa Fe offices of the New Mexico Environment Department, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other New Mexico labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. If an employee who is discharged works on a task, piece, or commission basis, a final wage payment is due within 10 days. If not paid on such basis, payment is required within five days. An employee who quits need not be paid until the next regular payday. State law requires regular paydays which may be no more than 16 days apart, except that monthly paydays are permitted, by agreement, in the case of professional, administrative, and executive employees, or for workers who are paid on a task, piece, or commission basis. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. New Mexico does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in New Mexico, and display a poster informing employees of their rights. You can obtain this poster from the Santa Fe office of the Human Rights Division of the New Mexico Department of Workforce Solutions, at the address listed in Section VI(a). The New Mexico human rights laws prohibit an employer from discriminating on the basis of race, color, national origin, ancestry, religion, sex, age, physical or mental handicap, serious medical condition, or, for an employer with fifty or more employees, spousal affiliation. Also, if an employer has fifteen or more employees, it may not discriminate against an employee based upon the employee's sexual orientation or gender identity. (4) Reporting new hires. Under federal welfare reform laws, employers in all states now have to report newly-hired (or rehired) employees to a designated state agency (the New Mexico New Hires Directory for New Mexico employers) within 20 days after the date of hire. If filing reports electronically, you must file twice a month, on dates that are no less than 12 nor more than 16 days apart. See Section VI(a) for contact information and on where and how to report new hires or Section VI(c) for a link to the New Mexico New Hires Directory website. (5) Summary of Posting Requirements. In addition to any required federal labor law posters, New Mexico employers are required to post the following state labor law posters in the workplace:
Employers should take advantage of the fact that the New Mexico Department of Workforce Solutions provides Six-in-One federal labor law posters at no charge to all New Mexico businesses, upon request. (On July 1, 2007, the New Mexico Department of Labor and the Governor's Office of Workforce Training & Development were combined to form this new agency, the New Mexico Department of Workforce Solutions.) VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. New Mexico's Economic Development Division can assist your or new New Mexico business with a variety of incentives and forms of assistance and is a good place to get started, for any new business or any business that is relocating in New Mexico. Economic Development Division Addresses and other contact information for other key state and federal government agencies in New Mexico, mentioned in preceding sections of this book, are listed below for your convenience. PUBLIC REGULATION COMMISSION. Most of the functions regarding formation of legal entities, such as incorporation, which are administered in most states by the secretary of state, are performed in New Mexico by the New Mexico Public Regulation Commission (which was formerly the Public Utilities Commission and Corporations Commission). Contact this office for information on:
New Mexico Public Regulation Commission SECRETARY OF STATE. While functions such as formation of corporations and LLC's and registration of foreign corporations and LLC's are handled by the Public Regulation Commission, the office of the New Mexico Secretary of State, Operations Division, should be contacted regarding:
New Mexico Secretary of State TAXES. Obtain state income, gross receipts tax, and other miscellaneous business tax forms, instructions and tax information from the New Mexico Taxation and Revenue Department, which is the main tax collection agency in New Mexico. Also register with this agency as an employer, for state income tax withholding purposes and, separately, on Form WC-1, for the special workers' compensation tax. New Mexico Taxation and Revenue Department OTHER STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
New Mexico Department of Workforce Solutions NEW HIRES. Report newly hired (or re-hired) employees within 20 days (or twice a month if filing electronically) after the date of hire, by mail or fax (or online, at the New Mexico New Hires Directory web site, at the link listed below in Section VI(c)). Mail or fax reports to: New Mexico New Hires Directory STATE LICENSES. The following agency is the main New Mexico licensing agency. Contact this state agency for information on state professional licensing requirements or regarding the issuance of securities. New Mexico Department of Regulation and Licensing GROSS RECEIPTS TAX. Obtain your gross receipts tax permit and information on the New Mexico gross receipts tax law from the Taxation and Revenue Department, at the address listed above for that agency. WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must obtain workers' compensation coverage, contact the New Mexico Workers' Compensation Administration, at the following address: Workers' Compensation Administration STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in New Mexico, contact: New Mexico Environment Department STATE ANTI-DISCRIMINATION LAWS. Contact the Human Rights Division for more detailed information on New Mexico civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Education & Mediation Bureau (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout New Mexico to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Santa Fe Community College (c) Internet Sites. For anyone who has access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and almost all major New Mexico state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in New Mexico. Since new sites are appearing frequently, you might also want to search for other New Mexico government Web sites by using one of the popular Internet search engines, such as Google or Yahoo. To start your Internet search for New Mexico government information, you may want to begin with the following Internet sites, which have links to federal and other New Mexico agency Web sites: State of New Mexico home page: New Mexico state agencies (listing of links to agency websites): Department of Taxation and Revenue (New Mexico tax information and downloadable state tax forms): New Mexico Public Regulation Commission (corporate and LLC filings, downloadable forms): Secretary of State of New Mexico (limited partnership and limited liability partnership filings, trademark and service mark registration): New Mexico Regulation and Licensing Department (professional licenses): Home page of the New Mexico Department of Workforce Solutions, formerly the Department of Labor, before July 1, 2007 (wage-hour standards, unemployment tax, and other labor laws): New Mexico New Hires Directory (reporting new hires online): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office (SBA) in New Mexico, or contact the New Mexico Economic Development Department at the address listed in Section VI(a) for that agency. The address of the Albuquerque SBA District Office is: U.S. Small Business Administration |
Copyright © 2008 Michael D. Jenkins
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