Beginning in 2020, New Mexico combined reporting will be mandatory for corporations that are members of a unitary business group. New Mexico has an exception, however, for corporations that properly elect to report and pay tax on taxable income as a:
- water’s edge group; or
- consolidated group.
Currently, the state permits elective combined reporting; though combined reporting is required for retailers with New Mexico facilities larger than 30,000 square feet.
A prior attempt by New Mexico to implement mandatory combined reporting was introduced in the legislature in 2017, but failed in committee.
How Will Multistate Income Be Apportioned?
All business income must be apportioned to New Mexico using an evenly-weighted three-factor apportionment formula:
- sales;
- property; and
- payroll.
However, filing groups may elect to use a single-sales factor formula if they:
- are predominately employed in manufacturing; or
- have headquarters in New Mexico.
FAS 109 Deduction Available
Where combined reporting results in changes to deferred tax amounts, a combined group will be entitled to a deduction. The deduction is determined using a formula based on deferred tax assets and liabilities. The deduction may not exceed 1/10 of the amount of the aggregate:
- increase in net deferred tax liabilities;
- decrease in net deferred tax assets; or
- change from a net deferred tax asset to a net deferred tax liability.
The deduction is available for 10 consecutive tax years beginning on or after January 1, 2026.
Opposition to Combined Reporting
The bill that contained the changes, H.B. 6, Laws 2019, was subject to some opposition during the legislative process. Specifically, the Council on State Taxation (COST) opposed the mandatory combined reporting provisions of the bill, citing several negative outcomes that could result from adoption, including:
- reduction in investment and job creation;
- unpredictable revenue stream; and
- administrative complexity.
How Many States Now Require Combined Reporting?
Currently, 27 states and Washington, D.C. require combined reporting. With New Mexico joining the pack next year, that brings the total to 29 jurisdictions that mandate combined reports.
Prior to New Mexico, New Jersey was the most recent addition, with their mandatory combined reporting requirements taking effect for privilege periods ending on or after July 31, 2019. Kentucky also recently enacted mandatory combined reporting, beginning after 2018.
Other States Following the Trend?
Over the past several years, other states have made unsuccessful attempts to enact combined reporting legislation.
Just this year, Maryland introduced S.B. 377, which would have mandated combined reporting for all corporations subject to the state’s income tax. Alternatively, S.B. 76 was introduced, though that bill would have required combined reporting only for retail trade and food and beverage establishments. A similar bill was proposed in 2018, and, in fact, Maryland has proposed legislation for mandated combined reporting almost every year since 2009.
Other states that have made such attempts during the past three years include:
- Alabama, in 2017;
- Pennsylvania, in 2017; and
- Indiana, in 2016.
With the trend skewing toward combined reporting, it is likely that these states, and others, will continue pushing to join the majority.
By Amber Harker, J.D.
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