Discovering Information

In the regulatory landscape of New Mexico, discovering information within the context of the Research and Development (R&D) tax credit refers to the specific pursuit of knowledge intended to eliminate technological uncertainty regarding the capability, method, or design of a new or improved business component. This discovery process must fundamentally rely on the principles of the physical or biological sciences, engineering, or computer science through a systematic process of experimentation aimed at enhancing function, performance, reliability, or quality.

A more granular analysis reveals that discovering information is not merely the acquisition of existing knowledge, but rather a targeted investigative activity designed to overcome technical obstacles that cannot be resolved through routine engineering or public information. Under the New Mexico Technology Jobs and Research and Development Tax Credit Act, this concept is operationalized as the “uncertainty test,” which serves as the primary gateway for credit eligibility. The law mandates that for research to be qualified, it must be undertaken to resolve an unknown: the taxpayer must be able to demonstrate that at the outset of the project, they did not know if the intended result was achievable, how to achieve it, or what the optimal design should be. This discovery must be “technological in nature,” meaning it utilizes the “hard sciences” rather than social sciences, market research, or aesthetic design. Furthermore, the discovery must be intended for a “permitted purpose,” specifically the creation or improvement of a business component—defined as a product, process, formula, invention, or software—intended for sale, lease, license, or internal business use. In essence, discovering information is the act of expanding a firm’s internal technical capabilities through the rigorous application of scientific inquiry.

The Statutory Framework of the New Mexico Technology Jobs and Research and Development Tax Credit Act

The legal foundation for research incentives in New Mexico is the Technology Jobs and Research and Development Tax Credit Act, codified as NMSA 1978, §§ 7-9F-1 through 7-9F-13. This legislation was originally enacted in 2000 with the specific goal of creating a favorable tax climate for technology-based businesses to flourish within the state, thereby increasing high-wage employment and technical specialization. The Act has seen significant evolution, particularly through amendments in 2015 and 2019, which expanded the credit rates and refined the definitions to better align with federal standards while maintaining unique state-level requirements.

The New Mexico statute bifurcates the incentive into two distinct components: the “basic credit” and the “additional credit”. The basic credit is an amount equal to 5 percent of qualified expenditures made by a taxpayer conducting qualified research at a qualified facility. This rate is doubled to 10 percent if the qualified facility is located in a rural area, a provision intended to stimulate economic development outside the urban centers of Albuquerque, Santa Fe, and Las Cruces. The additional credit provides a further 5 percent (or 10 percent in rural areas) against income tax liabilities, contingent upon the taxpayer meeting specific payroll growth benchmarks.

Credit Component	Standard Rate (Urban)	Rural Rate	Applicable Taxes
Basic Credit	5%	10%	GRT, Compensating Tax, Withholding Tax
Additional Credit	5%	10%	Personal or Corporate Income Tax
Total Potential Credit	10%	20%	Combined across programs

The definition of “taxpayer” within the Act is broad, encompassing any person liable for tax, responsible for withholding tax, or subject to an assessment. However, it explicitly excludes governmental units and subdivisions. For the purposes of R&D, the taxpayer must be the one bearing the financial risk and retaining substantial rights to the research.

Defining Qualified Research and the Facility Requirement

Section 7-9F-3 of the NMSA provides the definitions that govern the meaning of discovery in this context. Qualified research is defined as research that is undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component, and where substantially all activities involve a process of experimentation. The “substantially all” requirement is generally interpreted as 80 percent or more of the project activities.

A critical geographic constraint is the “qualified facility” requirement. A qualified facility is a site in New Mexico where research occurs, excluding any facility operated for the United States government. This is particularly relevant given New Mexico’s concentration of national laboratories. While Sandia National Laboratory and Los Alamos National Laboratory conduct massive amounts of R&D, private contractors operating these facilities on behalf of the federal government cannot claim this state tax credit for those specific operations. This creates a clear boundary: the state incentivizes private-sector, state-based discovery, not federally funded operations where the state does not have the primary economic stake.

Local Revenue Office Guidance and Law Application

The New Mexico Taxation and Revenue Department (TRD) serves as the administrative authority for these credits, issuing various “For Your Information” (FYI) publications and bulletins to guide taxpayers. These documents provide the “state revenue office guidance” that interprets how the statutory language applies in real-world scenarios.

FYI-106: The Master Guide to Business Credits

FYI-106 is the primary compendium for business-related tax credits in New Mexico. It clarifies that the R&D credit is part of a broader suite of incentives, including the Investment Credit and the High-Wage Jobs Tax Credit. The guidance emphasizes that credits can only be claimed against tax liabilities as designated by law. For the basic R&D credit, these include the state portion of the Gross Receipts Tax (GRT), the Compensating Tax, and the Withholding Tax.

A vital nuance in TRD guidance is the exclusion of “local option” gross receipts taxes from the credit’s reach. While the state’s portion of the GRT is eligible for offset, the local taxes imposed by municipalities or counties cannot be reduced by the basic R&D credit. This means a company must carefully calculate its state-only tax liability to determine the maximum benefit of its basic credit. Furthermore, the TRD strictly enforces a one-year window for application. A taxpayer must apply for approval within one year of the end of the calendar year in which the expenditures were made.

FYI-270: R&D Services and Gross Receipts Tax Dynamics

While FYI-106 covers the credit itself, FYI-270 focuses on the industry-wide application of Gross Receipts Tax to research and development. It defines “research and development services” as any activity engaged in for consideration to advance basic knowledge in natural science, advance technology, or develop new applications for existing products.

The TRD guidance in FYI-270 explains that R&D services performed in New Mexico are generally subject to GRT. However, several deductions are available that interact with the R&D landscape:

• Receipts from selling R&D services to the federal government or its agencies are deductible.
• Receipts from selling R&D services to persons who are prime contractors operating facilities designated as national laboratories are exempt if the services are performed outside New Mexico.
• Receipts from selling tangible personal property to a federal contractor for use in an R&D contract can be deducted if a Type 15 Nontaxable Transaction Certificate (NTTC) is provided.

This reveals the TRD’s approach: they use credits to incentivize the performance of R&D while using deductions and exemptions to prevent the double taxation of R&D inputs and outputs, particularly when dealing with federal entities.

The Role of the Compensating Tax in the R&D Context

To understand the meaning of discovery in New Mexico, one must also understand the Compensating Tax (NMSA 1978, § 7-9-7), as it is one of the primary taxes the R&D credit is designed to offset. Often called a “use tax,” the compensating tax is an excise tax on the use of property, services, or licenses in New Mexico where tax was not paid to another state.

The Compensating Tax was first imposed in 1939 as a companion to the Emergency School Tax and was merged into the Gross Receipts and Compensating Tax Act in 1967. Its legislative purpose is to protect New Mexico businesses from unfair competition by out-of-state entities that are not subject to gross receipts tax. For a high-technology firm, this is significant because R&D often requires the importation of specialized equipment—lasers, spectrometers, or high-performance servers—from out-of-state vendors. When a New Mexico company brings this equipment into the state for use in “discovering information,” they become liable for the compensating tax at a rate of 5.125 percent. The R&D credit serves as a direct antidote to this tax burden, allowing the firm to offset the 5.125 percent “use tax” liability with the 5 percent basic credit (or 10 percent in rural areas), effectively subsidizing the technical infrastructure required for discovery.

Deep Dive into the Four-Part Test of Discovery

The TRD and the New Mexico state courts have adopted the “Four-Part Test” to evaluate whether an activity constitutes qualified research. This test provides the operational definition of what it means to “discover information.”

Pillar I: The Section 174 Test (Uncertainty)

The first pillar requires that the research expenditures be eligible for treatment as expenses under IRC Section 174. This fundamentally hinges on “uncertainty” in the experimental sense. Uncertainty is defined as occurring when the information available to the taxpayer does not establish either (a) the capability of developing or improving the product, (b) the method of doing so, or (c) the appropriate design of the product.

Legal interpretation in cases such as PDG v. Commissioner (often cited in state-level guidance) establishes that performing basic calculations on available data is not discovery, because the taxpayer already possesses the information necessary to resolve the unknown. True discovery requires that the answer cannot be reached without an investigative activity.

Pillar II: The Technological Information Test

The second pillar mandates that the research be undertaken to discover information that is “technological in nature”. This requirement is met if the process of experimentation fundamentally relies on the principles of the physical, biological, or computer sciences, or engineering.

The TRD’s guidance clarifies that it is not necessary for the research to refine the “common knowledge” of the entire field; rather, it only needs to expand the knowledge of the taxpayer. A company does not have to be the first in the world to develop a specific technology to qualify; they only need to prove that they engaged in their own process of discovery because the “how-to” was not available to them.

Pillar III: The Business Component Test

The third pillar requires that the discovered information be intended for use in developing a new or improved “business component”. A business component is defined as any product, process, computer software, technique, formula, or invention that is held for sale, lease, or license, or used in the taxpayer’s trade or business. If a company is researching a new way to manufacture an existing product, the “process” itself is a separate business component.

Pillar IV: The Process of Experimentation Test

The final pillar is the “substantially all” requirement: at least 80 percent of the research activities must constitute a process of experimentation. This is defined as an evaluative process designed to identify and evaluate one or more alternatives. This often involves a series of trials where the data is analyzed and used to refine subsequent trials—the hallmark of the scientific method.

Pillar of Test	Technical Goal	Evidence Required
Section 174	Eliminate Uncertainty	Proof of technical hurdles at start
Technological Nature	Use Hard Science	Reliance on physics, chemistry, eng.
Business Component	Commercial Utility	Intent to sell or use in business
Experimentation	Evaluative Process	Trial logs, prototypes, lab notes

The Small Business Specialized Provisions

The Research and Development Small Business Tax Credit Act provides enhanced benefits for smaller entities, reflecting the state’s desire to support the “startup” ecosystem. Under current law, as amended in 2015, these entities can access a new “Technology Jobs and R&D Tax Credit” that includes powerful refundability options.

Eligibility Criteria for Small Businesses

To qualify as a “research and development small business,” an entity must meet four primary tests:

1. Employment: No more than 50 employees on a full-time-equivalent basis in the year the credit is claimed.
2. Revenue: Total revenues not exceeding $5,000,000 in any prior tax year.
3. Ownership: No more than 50 percent of the voting securities or equity may be owned by another business.
4. Expenditure Ratio: Qualified research expenditures for the 12 months ending with the month for which the credit is sought must be at least 20 percent of the total expenditures for that same period.

Refundability and Cash Flow

For a large corporation, the “additional credit” (the 5% or 10% rural income tax credit) is non-refundable; it can only reduce tax liability to zero, with excess carried forward for three years. However, for a qualified small business, the TRD provides for the refund of this excess. This is designed to provide immediate capital to pre-revenue or low-profit startups that are heavily invested in discovery.

The refund amounts are tiered to prevent a sudden drain on state coffers:

• If the excess credit is less than $3 million, 100% of the excess is refunded.
• If the excess credit is between $3 million and $4 million, two-thirds (66.6%) is refunded.
• If the excess credit is between $4 million and $5 million, one-third (33.3%) is refunded.

This refundability makes New Mexico a highly attractive destination for biotech, aerospace, and semiconductor startups, where the cost of “discovering information” is high and the time to commercial profitability is long.

Fiscal and Economic Impact Statistics

The Legislative Finance Committee’s (LFC) July 2025 assessment provides a robust statistical picture of the credit’s performance. Between FY22 and FY24, the program saw steady growth, culminating in a significant surge in expenditures in FY24.

Fiscal Year	Total Claims	Total State Expenditure	Economic ROI (Growth per $1)
10-Year Average	320	$5.8 Million	N/A
FY2023	320 (Est)	$4.9 Million	N/A
FY2024	390	$11.2 Million	92%

The LFC report notes that for every $1 spent on the credit, the New Mexico economy grows by 92 cents. While this suggests the state does not fully “recapture” the tax revenue through direct economic growth (a revenue return of -81 percent), the secondary benefits are substantial. The program is estimated to increase state personal income by $33 million annually due to higher wages and business profits, and it supports an estimated 165 new high-tech jobs per year at an average cost of $35,000 per job. The estimated net annual impact on the state’s GDP is $20.9 million.

Geographic Dispersion and Industry Clusters

Research indicates that the rural doubling rate has successfully influenced business location decisions. While Albuquerque (Bernalillo County), Santa Fe, and Las Cruces (Doña Ana County) are excluded from the rural rate because they exceed the 200,000 population threshold (or specific urban designations), the 10 percent credit rate in counties like Socorro (home to New Mexico Tech) or Los Alamos (surrounding the lab) creates significant incentive for rural innovation. Furthermore, the LFC notes that the credit targets export-based industries, which bring “new money” into the state rather than just circulating existing local funds.

Case Study: Discovering Information in the New Mexico Desert

To illustrate the practical application of these legal and regulatory concepts, consider the case of “AeroLithium Solutions,” a hypothetical battery technology company operating in Socorro, New Mexico.

The Technical Challenge: Solid-State Battery Stability

AeroLithium is attempting to develop a solid-state battery for unmanned aerial vehicles (UAVs). Traditional lithium-ion batteries are too heavy and prone to ignition. AeroLithium’s goal is to discover a ceramic electrolyte configuration that is non-flammable and provides 30 percent more energy density.

At the project’s inception, AeroLithium faces Capability and Design Uncertainty. They do not know if a ceramic material can be synthesized that remains stable during rapid discharge in high-altitude temperatures. This satisfy Pillar I of the Four-Part Test.

The Process of Discovery

The company employs engineers and chemists (Hard Sciences) to formulate a series of ceramic-polymer hybrids. This fulfills Pillar II (Technological in Nature).

Over eighteen months, they conduct a Process of Experimentation. They create 50 different electrolyte prototypes, testing each for conductivity, thermal expansion, and cycle life. They keep detailed lab notes and time logs for their staff, which constitutes the evidence required by TRD auditors. This fulfills Pillar IV.

The Tax Impact and Guidance Application

AeroLithium’s total qualified expenditures—including the salaries of their New Mexico-based chemists and the cost of chemicals and testing equipment—amount to $2,000,000. Because Socorro is a rural area, AeroLithium applies for the doubled rates.

1. Application Phase: Within one year of the end of the year, AeroLithium files Form RPD-41385 with the TRD, including a detailed project description and expenditure summary.
2. Basic Credit Approval: The TRD approves a basic credit of 10 percent, or $200,000. AeroLithium uses this to offset its state Gross Receipts Tax and the Compensating Tax it paid on lab equipment imported from Germany.
3. Additional Credit Approval: AeroLithium demonstrates it increased its annual payroll by $150,000 (meeting the benchmark of $75,000 per $1M of QRE). The TRD approves an additional 10 percent credit of $200,000.
4. Small Business Refund: AeroLithium has 12 employees and is pre-revenue, so it has no income tax liability. Under the small business provisions, the company applies for a refund of the $200,000 additional credit using Form RPD-41298.

In this example, the act of “discovering information” resulted in a $400,000 total tax benefit, providing the firm with critical non-dilutive capital to continue its research.

Administrative Hurdles and Legal Precedents

The meaning of discovery is often tested in the Administrative Hearing Office (AHO) and the state courts. Two major themes emerge from these rulings: the precision of accounting and the strictness of procedural deadlines.

The Cost Accounting Mandate

In Process Equipment Service Company (PESCO) v. New Mexico Taxation and Revenue Department, the court examined the definition of “qualified expenditure” under Section 7-9F-3(G). The statute requires that if a qualified expenditure is an allocation of an expenditure, the cost accounting methodology must be the same one used by the taxpayer in its other business activities.

The TRD denied PESCO’s credits, arguing they failed to use a formal cost accounting system. However, the court found that PESCO’s informal but systematic method of tracking labor costs was “fair, true, and reasonable”. The takeaway for taxpayers is that “discovering information” must be mathematically provable; a company cannot merely guess what percentage of an employee’s time was spent on research—they must have a consistent, defensible methodology for allocating those wages.

The Finality of the One-Year Deadline

In Team Specialty Products v. NM Taxation and Revenue Department, the taxpayer missed the one-year application deadline and sought an extension for “good cause”. The court ruled that the statutory language—”A taxpayer may apply… within one year”—establishes a mandatory window. The TRD has no discretion to waive this deadline, regardless of the taxpayer’s reasons for the delay. This underscores that in the New Mexico tax system, the discovery of information must be reported to the state in a timely manner, or the right to the incentive is permanently extinguished.

Practical Implementation and Compliance Strategies

For a business to successfully claim the New Mexico R&D credit, they must adopt a “compliance-ready” posture. This involves aligning internal workflows with the definitions found in NMSA and TRD guidance.

Annual Reporting Requirements

Section 7-9F-9(B) of the Act, as discussed in the LFC report and TRD guidance, requires taxpayers who are approved for the credit to file annual reports with the TRD. These reports are due by June 30 of the year following the claim and for the two subsequent years. They must include:

• A description of business operations in New Mexico.
• Data on payroll increases related to the additional credit.
• Geographic location of the facility.

Failure to comply with these reporting requirements can lead to a recapture of the credit or disqualification from future claims.

The “Shrinking Back” Rule

A crucial but often misunderstood regulatory concept is the “shrinking back” rule. If a company’s overall project (e.g., a new aircraft) fails the Four-Part Test, they can “shrink back” the test to a subcomponent (e.g., the landing gear). If the subcomponent also fails, they can drill down to a more granular level (e.g., a specific hydraulic valve) until they find a level where the test is satisfied. This rule ensures that companies are not penalized for the “routine” parts of a project, and instead can still receive credit for the truly innovative “discovery” occurring within a larger, standard engineering effort.

Final Thoughts: The Strategic Value of Scientific Inquiry

The New Mexico Research and Development Tax Credit is more than just a financial rebate; it is a statutory recognition of the value that the scientific method brings to the state’s economy. By centering the credit on the concept of “discovering information,” the legislature has created a standard that rewards genuine intellectual effort and technical risk-taking. The transition from a state of uncertainty to a state of technological knowledge is the engine of the modern economy, and the TRD’s guidance ensures that this engine is fueled efficiently and fairly.

For businesses, the path to success involves three critical elements: a robust experimental process, a geographic strategy that leverages the rural doubling rates, and a meticulous administrative approach that respects the strict deadlines and reporting requirements of the TRD. When these elements align, the “discovery of information” becomes a powerful competitive advantage, allowing New Mexico firms to lead the way in industries ranging from aerospace and biosciences to renewable energy and cybersecurity. As the FY2024 data suggests, the program is witnessing a new era of growth, reflecting a state that is increasingly defined not just by its natural beauty, but by its commitment to the frontiers of human knowledge.