Last month, we changed our format of our State of the Month posts by doing a “compare and contrast” between 2 states – California and Washington. This month, we continue our blog series with a contrast of a couple of southwest states – Texas and New Mexico – specifically their treatment of technology items for sales tax purposes.
Wait! Already know you need help with Texas or New Mexico issues? Please reach out to us at info@milesconsultinggroup.com
Software as a Service (SaaS) in Texas vs. SaaS in New Mexico
Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states (and some local jurisdictions) do tax the SaaS revenue stream. As you’ll see below, both states are aggressive regarding their treatment of sales tax.
In Texas, SaaS is treated as a data processing service and data processing services are taxable. However, twenty percent of the value of taxable data processing services is exempt from tax. So, in TX, 80% of the sales price of a SaaS subscription is taxable.
In New Mexico, services, including cloud computing services, are subject to the gross receipts tax, as long as the services are used in New Mexico. So, in NM, SaaS is taxable.
Software in Texas vs. Software in New Mexico
While Texas does not provide a definition for prewritten computer software, Texas defines a computer program as a series of instructions sold as a completed program coded for acceptance or use by a computer system and designed to permit the computer system to process data and provide results and information. The sale of software, is subject to tax as the sale of tangible personal, regardless of the method of delivery. With respect to services related to customization of prewritten software, the state takes an interesting approach. Software consulting services are presumed to be connected to the sale of taxable software when the consultant is also the seller of the taxable software. Charges to create a program or modify an existing program sold by a third-party are not taxable.Programmers creating computer programs from scratch for customers who are given all and exclusive rights to the programs are acting not considered to have sold the software, but rather are considered to have performed a service for the customer. As such, their work product is not subject to sales tax. As such custom software meeting these rules is not subject to tax.
In NM, packaged software means computer programming embodied in electronic, electromagnetic, or optical materials for transfer from one person to another, with or without explanatory materials, instructions or other programming and intended to be sold or licensed, without modification, to multiple buyers or users. Receipts from the sale or license of prewritten computer software delivered electronically are subject to gross receipts tax.
In NM, “Custom software” means computer programming specifically at the order of another or for a specific purpose. Charges for custom software are considered receipts for performing services and are subject to gross receipts tax, regardless of the method of delivery. Similarly, because New Mexico taxes gross receipts, charges for software customization of prewritten software are subject to tax as well.
Digital Goods
States vary in their treatment of electronically delivered goods including e-books, music, and streaming video. Some states consider all of these types of products to be taxable or not, while others call out specific taxability depending upon the product.
Texas does not define a digital product. However, the sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status. Generally, TX imposes sales and use tax on digital products.
In NM, Digital products are subject to gross receipts tax when delivered to customers in New Mexico, whether transferred electronically or via a tangible medium.
Sales Tax Holidays
States often offer tax holidays during specific times of the year, during which certain are sold tax free. These vary greatly by state. Here’s how TX and NM shake out.
The sales tax holiday in Texas already occurred on the period of April 22-24. During this time, generators, storms devices and other disaster preparedness items were sold tax free.
New Mexico offers a sales tax holiday from August 4-6. Clothing, computers, computer equipment and school supplies are sold sales tax free.
For more information on both of these sales tax holidays, click here.
Other tax matters
In most states, many services are not taxable, and those that are taxable are specifically stated. Generally, if non-taxable services are separately stated from the related tangible property, they are not subject to tax. However, as mentioned above, Texas taxes consulting services even if they are separately stated, for software installation or customization if the firm providing the consulting services also sold the software. Interestingly enough, if one company sells the consulting and another sells the software, then separately stated consulting is not taxable. We’ve seen this rule in action in an audit on several occasions.
Instead of a sales tax, NM administers a gross receipts tax. According to the New Mexico Department of Revenue, this tax is imposed on persons engaged in business in the state. In almost every case, the tax is passed to the consumer either separately stated or as part of the selling price. Only in its effect on the buyer does the gross receipts tax resemble a sales tax.
Economy
Texas’ large population, abundance of natural resources, thriving cities and leading centers of higher education have contributed to a large and diverse economy. Ever since the discovery of oil at Spindletop, energy has been a dominant force politically and economically within the state. If Texas were its own country, it would be the sixth largest producer of oil in the world.
Texas is the headquarters of many technology companies, such as Dell, Inc., Texas Instruments, Perot Instruments, Rackspace and AT&T. The National Aeronautics and Space Administration’s Lyndon B. Johnson Space Center (NASA JSC) in Southeast Houston, sits as the crown jewel of Texas’ aeronautics industry.
Mining, gas, and oil extraction are the largest contributors to the growth of real GDP in New Mexico. The state is home to vast deposits of energy resources including fossil fuels, minerals, crude oil, natural gas, and other substantial oils which makes it one of the top 10 energy producers in the nation. The state also surpassed California and Oklahoma to become the third-largest oil producer in the country. With the increasing diversification of the economy, New Mexico holds a favorable place for oil and natural gas producers to do business.
TX fun facts:
- Texas joined the United States in 1845 as the 28th state.
- The Houston Comets are the only team in the nation to win four back to back WNBA championships.
- The official state sport of Texas is the Rodeo.
- The state of Texas was an independent nation from 1836 to 1845.
- The Waco Bridge of Texas is the first suspension bridge in the country.
- Three of the top ten most populous cities in the United States are in Texas: Houston, Dallas and San Antonio.
- Texas is the largest producer of wool in the country.
- Until the Baylor Bears’ win in 2021, The University of Texas at El Paso was the only TX based college NCAA basketball team to win a national championship. In 1966, the (then) Texas Western Miners defeated Kentucky’s Wildcats 72-65. The team made history by becoming the first all-black starting line-up to win the championship against an all-white Kentucky team. The team inspired the film Glory Road. (Miles Consulting Group founder, Monika Miles, is a proud UTEP grad! And was sad to finally see that record fall!)
NM Fun facts:
- The world’s largest international hot air balloon festival is held annually in Albuquerque, NM.
- New Mexico’s capital, Santa Fe, is the highest capital city in the United States at 7,000 feet above sea level.
- The leaves of the Yucca, New Mexico’s state flower, can be used to make rope, baskets and sandals.
- White Sands National Monument is a desert, not of sand, but of gleaming white gypsum crystals.
- Northeast New Mexico has more than 1,000 buildings listed on the National Historic Register.
- More than 500, 100-million-year-old dinosaur footprints have been identified and preserved at Clayton Lake State Park.
- New Mexico has seven National Forests including the nation’s largest, 3.3 million-acre Gila National Forest, which includes the Gila Wilderness. Though many people picture New Mexico as desert terrain, ¼ of the state is actually filled with forests.
- The Navajo are the United States largest Native American Group, with 78,000 members in New Mexico, and a reservation that covers 14 million Acres.
We invite you to further explore TX and NM in these earlier blogs we crafted over the years. Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Texas, New Mexico, or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Call us to help you achieve the best tax efficiencies.
