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New Mexico Supreme Court Decision Allows State to Levy Income Tax on Out of State Corporations
The New Mexico Supreme Court recently released a long-awaited decision concerning the state’s ability to tax out-of-state corporations on income generated from in-state sales. The decision, which adds New Mexico to a growing list of states that can levy income tax on corporations with no in-state physical presence, further undermines the ability of large e-commerce operations to avoid state taxes by maintaining their offices in low tax jurisdictions.
Kmart Corp. had challenged income tax and gross-receipts tax assessments that New Mexico had imposed on Kmart’s Michigan-based subsidiary, Kmart Properties Inc. (“KPI”) for revenue generated from sales in New Mexico. Kmart had attempted to avoid such taxes by transferring revenue from Kmart stores in New Mexico to KPI in Michigan in the form of large licensing fees paid by the stores to KPI in exchange for the right to use Kmart’s trademarks in New Mexico.
The Supreme Court unanimously upheld the decision of the Court of Appeals that had established a legal foundation for the state to impose income tax on KPI based solely on an economic, as opposed to a physical, nexus to the state. However, the Court ruled on narrow statutory grounds that the licensing arrangement was an out-of state sale of the right to use intangible property as opposed to an in-state lease, and as such, was exempt from the state’s gross receipts tax.
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