2018 New Mexico Statutes
Chapter 7 - Taxation
Article 4 - Division of Income for Tax Purposes
Section 7-4-10 - Apportionment of business income.

A. Except as provided in Subsections B and C of this section, all business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is three.

B. A taxpayer whose principal business activity in New Mexico is manufacturing may elect to have business income apportioned to this state:

(1) in the taxable year beginning on or after January 1, 2014 and prior to January 1, 2015, by multiplying the income by a fraction, the numerator of which is twice the sales factor plus the property factor plus the payroll factor and the denominator of which is four;

(2) in the taxable year beginning on or after January 1, 2015 and prior to January 1, 2016, by multiplying the income by a fraction, the numerator of which is three multiplied by the sales factor plus the property factor plus the payroll factor and the denominator of which is five;

(3) in the taxable year beginning on or after January 1, 2016 and prior to January 1, 2017, by multiplying the income by a fraction, the numerator of which is seven multiplied by the sales factor plus one and one-half multiplied by the property factor plus one and one-half multiplied by the payroll factor and the denominator of which is ten;

(4) in the taxable year beginning on or after January 1, 2017 and prior to January 1, 2018, by multiplying the income by a fraction, the numerator of which is eight multiplied by the sales factor plus the property factor plus the payroll factor and the denominator of which is ten; and

(5) in taxable years beginning on or after January 1, 2018, by multiplying the income by a fraction, the numerator of which is the total sales of the taxpayer in New Mexico during the taxable year and the denominator of which is the total sales of the taxpayer from any location within or outside of the state during the taxable year.

C. A taxpayer whose principal business activity in New Mexico is a headquarters operation may elect to have business income apportioned to this state by multiplying the income by a fraction, the numerator of which is the total sales of the taxpayer in New Mexico during the taxable year and the denominator of which is the total sales of the taxpayer from any location within or outside of the state during the taxable year.

D. To elect the method of apportionment provided by Subsection B or C of this section, the taxpayer shall notify the department of the election, in writing, no later than the date on which the taxpayer files the return for the first taxable year to which the election will apply. The election will apply to that taxable year and to each taxable year thereafter until the taxpayer notifies the department, in writing, that the election is terminated, except that the taxpayer shall not terminate the election until the method of apportioning business income provided by Subsection B or C of this section has been used by the taxpayer for at least three consecutive taxable years, including a total of at least thirty-six calendar months. The election will apply to the separately filed return of the taxpayer or the combined or consolidated return the taxpayer has elected to be included pursuant to Section 7-2A-8.3 or 7-2A-8.4 NMSA 1978.

E. For purposes of this section:

(1) "headquarters operation" means:

(a) the center of operations of a business: 1) where corporate staff employees are physically employed; 2) where centralized functions are performed, including administrative, planning, managerial, human resources, purchasing, information technology and accounting, but not including operating a call center; 3) the function and purpose of which is to manage and direct most aspects and functions of the business operations within a subdivided area of the United States; 4) from which final authority over regional or subregional offices, operating facilities and any other offices of the business are issued; and 5) including national and regional headquarters if the national headquarters is subordinate only to the ownership of the business or its representatives and the regional headquarters is subordinate to the national headquarters; or

(b) the center of operations of a business: 1) the function and purpose of which is to manage and direct most aspects of one or more centralized functions; and 2) from which final authority over one or more centralized functions is issued; and

(2) "manufacturing" means combining or processing components or materials to increase their value for sale in the ordinary course of business, but does not include:

(a) construction;

(b) farming;

(c) power generation, except for electricity generation at a facility other than one for which both location approval and a certificate of convenience and necessity are required prior to commencing construction or operation of the facility, pursuant to the Public Utility Act [Articles 1 through 6 and 8 through 13 of Chapter 62 NMSA 1978]; or

(d) processing natural resources, including hydrocarbons.

History: 1978 Comp., § 7-4-10, enacted by Laws 1993, ch. 153, § 1; 2001, ch. 57, § 1; 2001, ch. 284, § 3; 2001, ch. 337, § 1; 2002, ch. 37, § 6; 2009, ch. 147, § 1; 2013, ch. 160, § 7; 2015 (1st S.S.), ch. 2, § 6.

Repeals and reenactments. — Laws 1993, ch. 153, § 1, repealed 7-4-10 NMSA 1978, as enacted by Laws 1985, ch. 203, § 10, and enacted a new section, effective June 18, 1993.

Repeals. — Laws 2001, ch. 337, § 7 repealed Laws 1999, ch. 35, § 1, which would have repealed this section, effective January 1, 2003.

Laws 2001, ch. 57, § 1 and Laws 2001, ch. 284, § 3 were repealed by Laws 2002, ch. 37, § 9, effective May 15, 2002.

The 2015 (1st S.S.) amendment, effective September 6, 2015, provided for taxpayers whose principal business activity in New Mexico is a headquarters operation to elect to have business income apportioned to this state, and added the definition for "headquarters operation"; in Subsection A, after "as provided in", deleted "Subsection B" and added "Subsections B and C"; in the introductory sentence of Subsection B, after "principal business activity", added "in New Mexico"; added Subsection C and redesignated the succeeding subsections accordingly; in Subsection D, after "Subsection B", added "or C", and added the last sentence; in Subsection E, added a new Paragraph (1), added the paragraph designation "(2)" preceding "'manufacturing'", and redesignated former Paragraphs (1), (2), (3) and (4) of Subsection D as Subparagraphs E(2)(a), (b), (c) and (d), respectively.

Applicability. — Laws 2015 (1st S.S.), ch. 2, § 25 provided that the provisions of Laws 2015 (1st S.S.), ch. 2, § 6 apply to taxable years beginning on or after January 1, 2015.

The 2013 amendment, effective January 1, 2014, phased in the use of a single sales factor by certain taxpayers in apportioning corporate income to the state over five years; deleted former Subsection B, which provided for the apportionment of business income by manufacturers, the procedure for electing the method of apportionment, and limitations on the election of a method of apportionment; and added Subsections B and C.

Applicability. — Laws 2013, ch. 160, § 14 provided that Laws 2013, ch. 160, § 7 applies to taxable years beginning on or after January 1, 2014.

The 2009 amendment, effective June 19, 2009, in Paragraph (3) of Subsection C, deleted "and the Electric Utility Industry Restructuring Act of 1999".

The 2002 amendment, effective May 15, 2002, inserted the exception in Subsection C(3).

The 2001 amendment, effective June 15, 2001, deleted preliminary language concerning the purpose of the section from former Subsection A; added current Subsection A; redesignated former Subsection A as Subsection B; inserted "For taxable years beginning prior to January 1, 2011" to Subsection B; and deleted former Subsection B concerning apportion of business income to the state.

Constitutionality of apportionment. — The United States Constitution does not impose any single method of apportionment on a multistate or multinational taxpayer's income. NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115 N.M. 612, 856 P.2d 982, cert. denied, 115 N.M. 677, 857 P.2d 788, cert. denied, 512 U.S. 1245, 114 S. Ct. 2763, 129 L. Ed. 2d 877 (1994).

Constitutionality of formula applied to taxation of dividends received from foreign subsidiaries. — Taxation of dividends from foreign subsidiaries under the separate corporate entity method violates the commerce clause of the United States Constitution, and application of the Detroit formula is an insufficient remedy. Conoco, Inc. v. N.M. Taxation & Revenue Dep't, 1997-NMSC-005, 122 N.M. 736, 931 P.2d 730, cert. denied, 521 U.S. 1112, 117 S. Ct. 2497, 138 L. Ed. 2d 1003 (1997), rev'g1997-NMCA-004, 122 N.M. 745, 931 P.2d 739.

Standard for challenge of apportionment. — A taxpayer seeking to invalidate a state's apportionment formula must show by clear and cogent evidence that the income attributed to the state is in fact disproportionate to the business transacted in that state. NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115 N.M. 612, 856 P.2d 982, cert. denied, 115 N.M. 677, 857 P.2d 788, cert. denied, 512 U.S. 1245, 114 S. Ct. 2763, 129 L. Ed. 2d 877 (1994).

Apportionment of multinational income. — Under this statutory formula, the income attributable to the state is determined by multiplying the taxpayer's gross income by a fraction which represents the ratio of sales, payroll, and property located in the state to the total sales, payroll, and property of the corporation. This does not violate the Foreign Commerce Clause of the U.S. Constitution by taxing foreign income because the tax in question is not a tax on any of the domestic corporation's foreign subsidiaries; instead, the tax falls upon an apportioned share of the domestic corporation's income which it receives in the form of royalties, interest, and dividends from its unitary foreign subsidiaries. The fact that the tax is apportioned in part upon the domestic corporation's foreign income sources does not constitute a bar to state taxation. NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115 N.M. 612, 856 P.2d 982, cert. denied, 115 N.M. 677, 857 P.2d 788, cert. denied, 512 U.S. 1245, 114 S. Ct. 2763, 129 L. Ed. 2d 877 (1994).

Taxation of undistributed earnings. — Because its subsidiaries with Subpart F (26 U.S.C. § 952) income remain part of the parent's unitary business and the federal government requires inclusion of the parent's Subpart F income in gross income, under the unitary business principle, the state assessments in question here do not violate the United States or New Mexico Constitutions, are fairly apportioned, and tax a fair portion of such income even though some of the income is undistributed subsidiary earnings. NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115 N.M. 612, 856 P.2d 982, cert. denied, 115 N.M. 677, 857 P.2d 788, cert. denied, 512 U.S. 1245, 114 S. Ct. 2763, 129 L. Ed. 2d 877 (1994).