At first glance, New Mexico’s effort to add digital advertising to its tax base did not appear to violate any new principles of good tax policy. What the state calls a gross receipts tax is actually a broad-based sales tax, and currently applies to traditional advertising — meaning that the addition of digital advertising revenue would at least not be discriminatory against digital commerce. Unfortunately, the state’s draft regulations appear to create vagueness surrounding where digital advertising receipts should be sourced.
Based upon the draft language, advertising revenue could conceivably be sourced to the address of the purchaser of the advertisement, the location of the server hosting the advertisement, or the location of the viewer of the advertisement.
Sales tax on remote sellers is generally destination-based, meaning that the transaction is sourced to and taxable by the state of the purchaser. In other words, if an Arizona customer purchases a product from a Utah business, Arizona gets to tax it because that’s the state of the customer. As New Mexico’s gross receipts tax is its version of a sales tax, one would expect that the gross receipts tax would also be sourced to the purchaser’s address. New Mexico has adopted destination-based sourcing for most other sales into the state, so many sellers will assume that this is the relevant sourcing rule for digital advertising sales as well. This is how traditional advertising sales are sourced, per regulations modeled on Streamlined Sales and Use Tax Agreement rules.
Unfortunately, based on the draft language promulgated by New Mexico’s Department of Revenue, advertising revenue could conceivably be sourced to the address of the purchaser of the advertisement, the location of the server hosting the advertisement, or the location of the viewer of the advertisement. These seemingly conflicting guidances under the draft regulation direct sellers of advertising services to source purchases to server locations and viewer location, respectively.
All told, sellers can be forgiven for having no idea whatsoever how to source digital advertising sales into New Mexico, leading to the most well-intentioned of businesses being likely to get it wrong. New Mexico should clarify these draft rules to require destination-based sourcing to the location of the purchaser’s address.
The simplest way to create compliance headaches for businesses selling goods and services across state lines is to needlessly depart from standards that other states follow. While adding digital goods and services to existing tax bases is the way to minimize discriminatory taxation against digital products, states, including New Mexico, must be careful not to create new complexity in doing so.