Local Option Gross Receipts Tax (Exclusion)

The Local Option Gross Receipts Tax exclusion refers to a statutory limitation within the New Mexico Technology Jobs and Research and Development Tax Credit that prevents the basic credit from offsetting any municipal or county-level portions of the gross receipts tax. This mechanism ensures that while the state incentivizes innovation by forgiving its portion of the tax, local jurisdictions maintain their revenue streams for essential community services and infrastructure.

Foundations of the New Mexico Gross Receipts Tax Framework

The New Mexico tax landscape is fundamentally distinguished by its reliance on the Gross Receipts Tax (GRT) rather than a traditional sales tax model. Understanding the “Local Option Exclusion” requires a foundational grasp of what the GRT represents and how it is structured across state and local layers. Unlike a sales tax, which is legally imposed on the consumer, the GRT is an excise tax imposed on any person or business entity for the “privilege of engaging in business” in New Mexico. This distinction is more than semantic; it shifts the legal incidence of the tax to the seller, although the economic burden is typically passed to the purchaser via a separately stated line item on an invoice.

The GRT is characterized by an exceptionally broad base, encompassing the sale of tangible property, the performance of services, the leasing of property, and even the licensing of intangibles such as software or franchises. Within this framework, the total rate paid by a business is not a single unified figure but a composite of three primary elements: the state base rate, municipal local options, and county local options.

As of July 1, 2023, the state portion of the gross receipts tax was adjusted to 4.875%. This state portion serves as the bedrock of the tax, but local jurisdictions are granted statutory authority to layer their own taxes on top to fund specific localized needs. These “Local Option Gross Receipts Taxes” are authorized by various state acts—such as the Municipal Local Option Gross Receipts Taxes Act and the County Local Option Gross Receipts Taxes Act—and are collected by the New Mexico Taxation and Revenue Department (TRD) alongside the state portion.

The complexity for businesses arises from the fact that these local rates vary significantly. While the state portion remains constant across all jurisdictions, the local add-ons can range from 0.125% to over 4.0%, leading to combined rates that often exceed 8% or 9% in urban centers like Santa Fe or Las Cruces. For a business engaged in research and development, the “exclusion” of these local options from tax credit eligibility represents a critical variable in their fiscal planning and return on investment calculations.

Tax Component	Legislative Authority	Applicable Rate (Current)
State Gross Receipts Tax	NMSA 1978, § 7-9-4	4.875%
Municipal Local Options	Various Municipal Acts	0.000% to 4.000%+
County Local Options	Various County Acts	0.125% to 2.000%+
Composite Total Rate	Combined Statutes	5.125% to 9.0625%+

The Technology Jobs and Research and Development Tax Credit Act

The primary vehicle for R&D incentives in the state is the Technology Jobs and Research and Development Tax Credit Act, codified at NMSA 1978, §§ 7-9F-1 through 7-9F-13. The stated purpose of this legislation is to provide a favorable tax climate for technology-based businesses, particularly those engaging in research, development, and experimentation, while simultaneously promoting the creation of high-wage jobs.

The Act offers two distinct tiers of benefits: the Basic Credit and the Additional Credit. The Basic Credit is designed to offset immediate operational taxes, while the Additional Credit provides a more substantial incentive linked to payroll growth, which can even become refundable for smaller enterprises.

The Mechanics of the Basic Credit

The Basic Credit allows a taxpayer conducting qualified research at a qualified facility to claim a credit equal to 5% of their qualified New Mexico expenditures. If the research facility is located in a designated “rural area,” this credit amount is doubled to 10%.

The defining characteristic of the Basic Credit is its application pool. It is permitted to offset three specific tax liabilities:

1. The state portion of the Gross Receipts Tax (excluding all local options).
2. The Compensating Tax (use tax).
3. The Withholding Taxes (both wage and non-wage).

The statutory language explicitly states that no taxpayer may claim an amount of approved basic credit for any reporting period that exceeds the sum of these three components. This means that the credit is non-refundable in its “basic” form; if the credit exceeds the eligible tax liability in a given month, the excess can be carried forward for up to three years from the date of the original claim.

The Additional Credit and Payroll Benchmarks

The Additional Credit offers a second layer of 5% (or 10% rural) credit, effectively allowing a total state credit of up to 20% of R&D expenditures. However, the Additional Credit is primarily aimed at Personal Income Tax (PIT) or Corporate Income Tax (CIT) liabilities.

To unlock the Additional Credit, a business must demonstrate a commitment to job creation within the state. The taxpayer must increase their annual payroll expense by at least $75,000 over the “base payroll” for every $1,000,000 in qualified expenditures claimed in the same tax year. The “annual payroll expense” refers to the wages paid to employees in New Mexico during the tax year for which the credit is sought.

Deciphering the Local Option Exclusion

The specific exclusion of local option taxes from the R&D credit was formalized through a 2015 amendment to the Act. This legislative change was a strategic move to reconcile the state’s aggressive economic development goals with the fiscal autonomy and solvency of local governments.

Statutory Origin and Logic

Before 2015, the credit rate was 4% and could be applied more broadly against the total combined GRT. However, this led to unintended consequences for municipal and county budgets. Because the state mandated the credit, it effectively forced local governments to forego their portion of the GRT revenue whenever a local tech firm applied an R&D credit. In high-tech hubs, this created significant revenue gaps for local infrastructure projects.

The 2015 reform increased the credit to 5% as a “carrot” for businesses but inserted the “Local Option Exclusion” as the “stick” to protect local coffers. Under NMSA 1978 § 7-9F-9, the Basic Tax Credit “may be applied against the taxpayer’s compensating tax, withholding tax or gross receipts tax (excluding local option gross receipts tax) due to the state of New Mexico”.

This ensures that the state bears the full financial burden of the incentive. When a company uses the credit to offset its GRT, the state General Fund receives less money, but the local municipality still receives its full distribution from the TRD based on the local option rates.

Application in the Destination-Sourcing Era

Effective July 1, 2021, New Mexico transitioned to destination-based sourcing for most transactions, meaning the GRT rate is determined by where the goods are delivered or where the product of a service is used. This shift significantly complicates the calculation of the “local option exclusion.”

A business performing R&D services in Albuquerque but delivering the final report or software license to a client in Santa Fe must report that receipt using the Santa Fe location code and rate. When it comes time to apply the R&D credit, the business must isolate the 4.875% state portion of that Santa Fe receipt to determine the maximum credit offset, while still remitting the Santa Fe local option portion.

Transaction Location	Combined Rate (Approx.)	State Portion (Eligible)	Local Portion (Excluded)
Albuquerque	7.875%	4.875%	3.000%
Santa Fe (City)	8.1875%	4.875%	3.3125%
Las Cruces	8.500%	4.875%	3.625%
Unincorporated County	5.125% – 6.5%	4.875%	0.250% – 1.625%

Qualified Expenditures: The Basis for the Credit

The “Qualified New Mexico Expenditures” are the financial foundation upon which the credit percentage is applied. These are defined as expenditures made for conducting qualified research at a “Qualified Facility” in New Mexico.

Categories of Eligible Costs

The TRD provides specific guidance on what constitutes a qualified expenditure. These costs must be directly related to the research activity and occur within the physical bounds of the New Mexico facility.

1. Labor and Payroll: This includes wages and salaries for employees directly performing research, as well as those supervising or supporting the research efforts. It typically excludes administrative or overhead staff not directly engaged in the technical project.
2. Supplies and Consumables: Test materials, chemicals, biological agents, technical books, and manuals used in the research process are all eligible. These are items that are consumed or used up during the R&D phase.
3. Equipment and Software: Machinery, laboratory equipment, hardware, and specialized software or software upgrades are qualified if used directly in research. Note that for large equipment, businesses must choose between this R&D credit and the “Investment Credit” for the same equipment in a single reporting period.
4. Consultants and Contractors: Payments made to third-party consultants or contractors are eligible, provided the services are performed in New Mexico and are tied to the qualified research project.
5. Facility Operational Costs: General operating expenses of the facility, such as utilities or maintenance, can be included if they are properly allocated to the research function.

Significant Exclusions

Not all business costs qualify. The Act specifically excludes:

• Expenditures for the purchase of land or the improvement of real property (buildings).
• Research conducted for the U.S. Government at a facility operated for the government (e.g., certain activities at national labs).
• Expenditures that are reimbursed by an entity that is not an affiliate of the taxpayer.
• Post-production activities such as quality control, routine testing, or market research.

The Rural Area Bonus: Doubling the Incentive

To promote economic development outside of New Mexico’s primary urban corridors, the Act provides a “Rural Area” bonus that doubles both the Basic and Additional Credits.

Defining Rural Jurisdictions

A “Rural Area” is defined negatively in the statute. It includes any area in the state except:

• The New Mexico State Fairgrounds in Albuquerque.
• An incorporated municipality with a population of 30,000 or more according to the most recent federal decennial census.
• Any area within three miles of the external boundaries of such a municipality.

Based on current census data, the “Urban Areas” (ineligible for the bonus) include Albuquerque, Las Cruces, Rio Rancho, Santa Fe, and Roswell. Interestingly, because the exclusion is based on a three-mile buffer, a business located just outside the city limits of Santa Fe might still be considered “Urban” if it falls within that radius.

Economic Implications for Rural Tech

The doubling of the credit to 10% for the Basic and 10% for the Additional (totaling 20%) is one of the most aggressive R&D incentives in the United States. For a biotech firm in a rural county like Mora or Sierra, this high credit rate significantly offsets the higher costs of logistics and specialized talent recruitment often associated with rural locations.

However, even in a rural area, the “Local Option Exclusion” applies. While the credit rate is higher, it still can only offset the 4.875% state portion of the GRT. This creates a situation where rural businesses often accumulate large credit carryforwards, as their total credit (10% of expenditures) frequently exceeds their monthly state GRT liability (4.875% of receipts).

Administrative Guidance: The Claim Trail

The New Mexico Taxation and Revenue Department (TRD) maintains a rigorous process for certifying and claiming the credit. Taxpayers cannot simply “take” the credit on their return; they must go through a formal approval process.

Stage 1: The Pre-Approval Application (Form RPD-41385)

Taxpayers must apply for approval of the credit using Form RPD-41385, “Technology Jobs and Research and Development Tax Credit Application”.

• Timing: The application for the Basic Credit must be submitted within one year following the end of the calendar year in which the qualified expenditure was made.
• Documentation: The TRD requires a detailed project description and a breakdown of expenditures by category. If the claim is substantial, the TRD may request an auditor review of the underlying invoices and payroll records before issuing an approval.
• Approval: Once reviewed, the TRD issues an approval letter or certificate, which authorizes the taxpayer to begin claiming the credit on their returns.

Stage 2: Claiming on the Tax Return (Form RPD-41386)

After receiving approval, the taxpayer uses Form RPD-41386 to actually apply the credit against their tax liabilities.

• Reporting: The credit is reported on the “Schedule CR” of the taxpayer’s monthly or quarterly GRT filing (Form TRD-41413) or their Withholding tax filing (Form TRD-41414).
• The Calculation Cap: On the claim form, the taxpayer must explicitly calculate their “eligible tax liability.” This is where the Local Option Exclusion is applied. The taxpayer must multiply their taxable gross receipts by 0.04875 to determine the state portion that can be offset.

Stage 3: Pass-Through Entity Distributions (Form RPD-41368)

Many technology firms are structured as Pass-Through Entities (PTEs) such as LLCs or S-Corporations. The R&D credit is earned at the entity level but can be distributed to the owners or partners.

• Mechanism: The PTE must file Form RPD-41368, “Notice of Distribution of Technology Jobs and Research and Development Tax Credit,” to inform the TRD and the owners of their share of the credit.
• Utilization: The owners then claim their portion of the credit on their individual personal income tax returns (PIT) or corporate income tax returns (CIT).

Small Business Provisions and Refundability

Recognizing that startups often have high R&D expenditures but little to no revenue (and thus no GRT or income tax liability to offset), the Act provides special refundability rules for “Qualified R&D Small Businesses”.

Eligibility for Small Business Status

A business is considered a “Qualified R&D Small Business” if it meets the following three tests during the year for which the credit is claimed:

1. Employee Count: The business employed no more than 50 employees.
2. Expenditure Cap: Total qualified expenditures were no more than $5,000,000.
3. Ownership Independence: No more than 50% of the business is owned, directly or indirectly, by another business entity.

The Refundable Additional Credit

For these small businesses, the Additional Credit (the second 5% or 10% tier) becomes refundable. If the approved Additional Credit exceeds the taxpayer’s income tax liability, the TRD will issue a refund check based on the following schedule:

Total Qualified Expenditures	Refundable Proportion of Excess
< $3,000,000	100% of the excess credit is refunded.
$3,000,000 to $3,999,999	66.67% (two-thirds) of the excess is refunded.
$4,000,000 to $5,000,000	33.33% (one-third) of the excess is refunded.

This refundability is a vital lifeline for the state’s burgeoning biotech and aerospace startups, allowing them to reinvest state capital back into their research programs before they have reached commercial scale.

Quantitative Example: Applying the Local Option Exclusion

To fully grasp the practical application of these rules, we will model a mid-sized technology firm operating in an urban environment.

Hypothetical Firm Profile: “AeroTech Solutions LLC”

• Location: Albuquerque (Location Code 02-100).
• Total GRT Rate: 7.875% (4.875% State + 3.000% Local).
• Taxable Gross Receipts (Monthly): $500,000.
• Qualified R&D Expenditures (Annual): $2,000,000.
• Approved Basic Credit (5% Urban): $100,000.
• Wage Withholding Due (Monthly): $5,000.
• Compensating Tax Due (Monthly): $2,000.

Step 1: Determine Monthly GRT Liability

Before applying any credits, AeroTech calculates its total GRT obligation for the month.

• Total GRT = $500,000 × 0.07875 = $39,375.

Step 2: Segregate the Local Option Portion

Under the exclusion rule, AeroTech must determine the amount it cannot offset.

• Local Option Portion (Excluded) = $500,000 × 0.0300 = $15,000.
• State Portion (Eligible for Offset) = $500,000 × 0.04875 = $24,375.

Step 3: Calculate the Total Offset Cap

The Basic Credit can be applied against the sum of the state GRT portion, withholding, and compensating tax.

• Offset Cap = State GRT ($24,375) + Withholding ($5,000) + Compensating ($2,000).
• Total Monthly Offset Cap = $31,375.

Step 4: Apply the Credit

AeroTech applies $31,375 of its $100,000 approved R&D credit.

• Amount Paid to State: $15,000 (The local option GRT portion).
• Amount Saved via Credit: $31,375.
• Remaining Credit Carryforward: $100,000 – $31,375 = $68,625.

Analysis of the Example

In this scenario, the “Local Option Exclusion” forced the company to pay $15,000 in cash despite having $100,000 in available credits. If the exclusion did not exist, the company could have used its credit to cover the entire $39,375 GRT liability plus the other taxes, paying $0 in cash for that month.

Interaction with Other New Mexico Incentives

Businesses must often choose between the R&D credit and other powerful incentives. Understanding these interactions is critical for maximizing the total tax benefit.

High-Wage Jobs Tax Credit (NMSA § 7-9G-1)

The High-Wage Jobs Tax Credit (HWJTC) offers a credit equal to 8.5% of wages and benefits for new jobs paying over $40,000 (rural) or $60,000 (urban).

• Superiority in Offsets: Unlike the R&D credit, the HWJTC is applied against the “modified combined tax liability,” which includes local option gross receipts taxes.
• Double Dipping Rules: A taxpayer cannot claim both the Technology Jobs and R&D Credit and the HWJTC for the same job in the same period. Generally, the HWJTC is more valuable for high-growth firms with high-salaried employees, while the R&D credit is better for firms with high non-payroll research costs (like equipment and materials).

Investment Credit (NMSA § 7-9A-1)

The Investment Credit provides a credit equal to the GRT or Compensating Tax paid on equipment used in manufacturing.

• Local Option Exclusion: Like the R&D credit, the Investment Credit also excludes local option taxes.
• Election: If a company purchases a $1,000,000 piece of research equipment, they can claim it as an R&D expenditure (5% credit) or as an Investment Credit (approx. 5.125% credit). However, they cannot claim both for the same reporting period.

Credit Name	Rate	Refundable?	Local Option Excluded?
R&D (Basic)	5% / 10%	No (3-yr Carryforward)	Yes
R&D (Additional)	5% / 10%	Yes (Small Biz Only)	N/A (Offsets Income Tax)
High-Wage Job	8.5%	Yes (All)	No
Investment	~5.125%	Partially	Yes

Statistical Trends and Economic Impact

The Legislative Finance Committee (LFC) routinely evaluates the performance of the Technology Jobs and R&D Tax Credit to ensure it meets its intended purpose.

Claims and Fiscal Expenditure

In Fiscal Year 2024, the credit saw 390 claims totaling $11.2 million in state revenue impact. This represents a steady usage trend over the last decade, with an average annual expenditure of $5.8 million.

Employment and Personal Income Growth

The LFC estimates that the credit increases statewide employment by an average of 165 jobs per year. While the cost per job ($35,000) is significant, the credit is credited with increasing state personal income by an average of $33 million annually due to the higher wage earnings and increased business profits associated with tech-based sectors.

Regional Concentration

Despite the doubled “Rural Area” bonus, the majority of claims remain concentrated in the Rio Grande corridor (Bernalillo, Sandoval, and Santa Fe counties). This suggests that access to the national laboratories and a specialized workforce remains a stronger driver of location decisions than the tax credit differential alone. However, the rural bonus has been effective in supporting satellite facilities and manufacturing operations in more distressed counties.

Compliance and Audit Risks

The TRD is increasingly focused on compliance for technology credits. The “Local Option Exclusion” is a frequent area of error during audits.

Common Audit Pitfalls

1. Improper Location Coding: Claiming a credit against the total combined rate of an urban location without backing out the local portion.
2. Over-Allocation of Payroll: Including 100% of an employee’s wages in the R&D expenditure base when the employee only spends 50% of their time on qualified research projects.
3. Failure to Prove “Qualified Research”: Not having the technical documentation (e.g., project plans, test results) to prove the research meets the IRC § 41 four-part test.
4. Ownership Disqualification: Small businesses failing to disclose that they are 51% owned by a larger parent company, which renders them ineligible for the refundable portion of the Additional Credit.

Audit Guidelines and Record Retention

The TRD recommends maintaining records for at least four years, although a six-year period is safer for businesses with significant carryforwards. Records should include the “NMBTIN” (New Mexico Business Tax Identification Number), all RPD-41385 approval forms, and detailed cost accounting summaries that link specific invoices to qualified research projects.

The Future of R&D Incentives in New Mexico

The current structure of the Technology Jobs and R&D Tax Credit is stable, with no major statutory changes since the 2015 and 2019 amendments. However, the 2022 legislative session introduced a significant reduction in the state GRT portion (from 5.000% to 4.875%), which effectively reduced the “cap” of the R&D credit offset for many businesses.

Potential Legislative Developments

Observers of New Mexico tax policy anticipate future discussions around:

• Expanding Local Participation: Allowing municipalities to “opt-in” to the credit, potentially waiving their local option taxes in exchange for specific local hiring commitments.
• Inflation Adjustment for the Cap: Raising the $5,000,000 expenditure cap, which has remained unchanged while the cost of laboratory equipment and tech salaries has risen sharply.
• Specific Industry Carve-outs: Providing even higher rates or removing the local option exclusion for high-priority sectors like hydrogen energy or space-tech.

Final Thoughts

The New Mexico Local Option Gross Receipts Tax exclusion is a fundamental component of the state’s fiscal policy, balancing the need for competitive business incentives with the revenue requirements of local governments. For technology companies, the “exclusion” means that the R&D credit effectively acts as a 4.875% state-level discount on operations, rather than a full offset of all gross receipts taxes.

While the administrative burden of tracking location codes and performing split-tax calculations is high, the overall incentive package—especially when combined with the doubled rural rates and small business refundability—positions New Mexico as a premier destination for research-intensive industries. Success in utilizing the credit requires not only technical innovation but also meticulous accounting and a deep understanding of the New Mexico Taxation and Revenue Department’s specific guidance. As the state continues to refine its GRT system, the Technology Jobs and R&D Tax Credit will remain the cornerstone of its efforts to transition into a high-wage, innovation-led economy.