Commissions on Royalties Taxable in New Mexico

Friday, September 26th, 2014

The Department of Taxation and Revenue in New Mexico.
New Mexico

The Department of Taxation and Revenue ("Department") recently ruled that a taxpayer's commissions on franchise royalties were subject to tax.

The taxpayer sold licenses to franchisees of a massage corporation. The taxpayer helped franchisees get licenses from the corporation and set up their clinics. The taxpayer also checked up on franchisees to ensure that they were using the corporation's brand according to the corporation's standards. As long as the taxpayer did these checkups, the taxpayer got a commission on the monthly royalties that franchisees paid to the corporation.

New Mexico taxes the gross receipts from services performed within New Mexico. The gross receipts include commissions, fees, and amounts paid for the performance of the services. New Mexico presumes that all receipts of a taxpayer from engaging in business are subject to the gross receipts tax. The taxpayer argued that the commissions were royalties because they were derived from royalty payments. New Mexico statutes do not specifically include royalties as a part of gross receipts.

The Department ruled that the commissions were not royalties. Franchisees paid monthly royalties to the massage corporation, not to the taxpayer. The corporation paid the taxpayer commissions in exchange for checking up on how franchisees used the corporation's brand. The commissions were therefore receipts for performing a service and were subject to tax.

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