I received a letter telling me I owe gross receipts tax for prior years. What's this all about?

The letter is usually called Notice of Intent to Assess Gross Receipts Tax. It means you're being audited. It does not mean you already owe the tax.

How did this happen?

​This situation came about because the N.M. Taxation & Revenue Dept. (TRD) has received from the IRS the sales you reported on federal Schedule C as a sole proprietor plus sales your customers reported to the IRS on Forms 1099. The TRD compared the IRS information to the sales you reported for gross receipts tax. If the amount reported to TRD is less than the information they got from the IRS, the TRD sees an apparent underpayment of GRT and opened the audit.

Common circumstances that cause the mismatch​

• The business did not register with the TRD. 

• The business registered but did not file GRT reports.

• The business did not do its homework. If it had, it would have discovered the requirements for business's doing business in New Mexico to report their gross receipts and pay gross receipts tax. 

• The business in located outside of New Mexico and has customers in New Mexico. 

• The business is operated by individuals who moved to New Mexico and are not familiar with the GRT.

• The business did not report sales that are not subject to GRT.​

If you don't respond to the letter

​The audit letter gives you 60 days in which to provide the department proof that some of your gross receipts are not subject to gross receipts tax. If you don't respond, the department will make the tax a legal debt (called an assessment).

​Along with the audit letter there will be an offer for you to participate in a Managed Audit and avoid penalties and interest.

 

Do independent contractors pay New Mexico gross receipts tax?

 

The first thing to know about being an independent contractor (self-employed person) is that, under both federal and New Mexico tax law you are considered to be in business. That means that in addition to federal and state income taxes, you owe self-employment tax on the profit from your business and New Mexico gross receipts tax on your sales.

All businesses doing business in the state are required to register with the N.M. Taxation & Revenue Department and report their gross receipts (aka sales) in order to determine the amount of gross receipts tax (GRT) for which they are liable.

Once the registration process is complete the business will receive their Business Tax Identification Number (BTIN). This number is used to report gross receipts and NM income tax withheld from employees' wages. 

​Important: Your New Mexico BTIN is a separate identification number from your IRS Employer Identification Number (EIN) and, if you have employees, the Employer Account Number (EAN) issued by the New Mexico Department of Workforce Solutions for reporting and paying state unemployment tax. When contacting a tax authority, be sure to use the ID number that particular agency has assigned to your business. Note: ID numbers issued by the Taxation & Revenue Dept. before July 1, 2021 were called CRS ID numbers.

Note: Out-of-state businesses are also required to file income tax returns to report the share of their profit from doing business in New Mexico.

Learn more about NM gross receipts tax.

Isn't New Mexico gross receipts tax the same as sales tax?

It is a sales tax but ... The main difference from sales tax in most other states is that GRT also applies to sales of services, whereas, in most states, sales tax applies only to sales of goods. Gross receipts tax (GRT) applies to all businesses operating in New Mexico or having sales to customers in New Mexico. It's important to be aware that individuals who are independent contractors are considered to be in business.

There are some unexpected interpretations of what services are. One example is that construction activity is considered to be providing services. Another is that commissions are subject to GRT even if the sales on which they are based are also subject to GRT.

Tip. Even though exempt gross receipts are technically not reportable, they should be reported. That’s because the N.M. Taxation & Revenue Dept. (TRD) compares reported to the IRS with gross receipts reported to the TRD. Any instance of under-reporting causes the state to conduct an audit to determine the apparent amount of GRT owed by the seller. To prevent exempt sales from being taxes, they are deducted from total sales.

Important: Deductions for determining taxable gross receipts should not be confused with deductions of business expenses income tax returns.

Learn more about NM gross receipts tax.