New Mexico Administrative Code
Title 3 - TAXATION
Chapter 2 - GROSS RECEIPTS TAXES
Part 1 - GENERAL PROVISIONS
Section 3.2.1.29 - SERVICES

(1) A transaction involving both the transfer of tangible personal property to the buyer and the performance of a service other than a construction or research and development service is predominantly a service when:

(2) When the transaction is predominantly a service other than construction, any tangible personal property transferred in conjunction with the service is incidental to the service and the value of the property becomes an element of and is incorporated into the value of the service sold. Type 2 nontaxable transaction certificates (NTTCs) may not be executed to acquire the property so incorporated.

(3) Example A1: C, a consultant, reviews operations of clients; C does not engage in the business of selling office supplies. C is hired to evaluate certain operations of L. C presents the evaluation to L as a written report, with supplemental data on computer disks. C contends that the paper used for the report and the computer disks were sold to L and therefore C may execute a Type 2 NTTC to acquire these tangibles. The transaction with L is predominantly the performance of a service. The paper and computer disks convey the result of the C's service and are incidental to that service. C may not execute Type 2 NTTCs for the purchase of these tangibles.

(4) Example A2: X is engaged in the business of performing certain services and is not engaged in selling tangible personal property in the ordinary course of business. X enters into a cost plus a fixed fee contract with Y to conduct a survey of residents of this state to determine consumer acceptability of and demand for particular household products which Y manufacturers and plans to distribute into New Mexico. The contract specifies that on completion or termination of the contract any tangible property purchased by X, and billed by X, will be paid by Y as a cost of fulfilling the requirements of the contract. X chooses to purchase a personal computer to use in the performance of the service. X will enter results of the surveys into the computer which will classify the responses and generate reports which X will analyze, interpret and submit to Y. Since X has the power to exert significant influence over the degree of involvement (use) of the computer under the contract and since X is not engaged in selling computers or similar property in the ordinary course of business, X's receipts attributed to the cost of the computer are receipts from performing a service. X may not execute a Type 2 NTTC for the purchase of the computer.

(5) Example A3. A well servicing company uses disposable bits and other disposable "rubber goods" in servicing oil and natural gas wells. The disposable items are used up in the course of the servicing; pieces of the abraded material are left in the well. The company claims it should be allowed to execute Type 2 NTTCs because the disposable items are left with the owner(s) of the well. These materials are incidental to the performance of the service. The company may not execute Type 2 NTTCs in acquiring these disposable items.

(6) Construction is defined to be a service and that service is defined to include all tangible personal property which becomes an ingredient or component part of the construction project. Under the provisions of Section 7-9-51 NMSA 1978, however, a person engaging in the construction business may execute a nontaxable transaction certificate for the purchase of tangible personal property which will become an ingredient or component part of a construction project.

(7) The product of a research and development service may be tangible property, such as prototypes, facsimiles, reports or other similar property. Even though the product of the service may itself be tangible, receipts from the transaction are receipts from the sale of a service and not from the sale of tangible personal property. Accordingly the performer of research and development services may not execute a nontaxable transaction certificate when purchasing tangible personal property used to assemble or create such product of the service, except as provided by Section 3.2.205.11 NMAC.

(8) Example B1: B, an engineering company, contracts to design a product for Y, a manufacturer, who intends to manufacture the product for sale to the general public. The contract requires B to submit plans for the product and a prototype of it. B contends that the plans and prototype are tangible personal property and therefore Type 1 or Type 2 NTTCs may properly be executed. B is performing a research and development service, even though the product of the service is embodied in tangible personal property. The tangibles used are incidental to the performance of the service. Type 1 and Type 2 NTTCs may not be executed to acquire the tangible personal property making up the plans and prototype.

(9) Example B2: B, an engineering company, is a qualified contractor within the meaning of Section 3.2.205.11 NMAC under a contract with D, an agency of the United States. The contract is a research and development contract covered by the agreement between the state of New Mexico and several agencies of the United States, including D. The contract calls for B to design and submit plans for a rocket motor and to develop and deliver a facsimile of the rocket casing to a research facility for testing. B maintains that B is selling tangible personal property to the federal government. B is performing research and development services. The plans and facsimile are products of that service. The transaction is predominantly the performance of a service rather than the sale of tangible personal property. B is not selling tangible personal property to the federal government but may be eligible to execute Type 15 NTTCs if the conditions specified by Section 3.2.205.11 NMAC and the State-Federal agreement are met.

(10) When the performer of the service either is regularly engaged in selling or leasing by itself the type of tangible personal property transferred in the transaction, a single transaction may encompass both the sale of a service and the sale of property as distinct and separable parts of the transaction. In such a case, Type 2 NTTCs may be executed to acquire the tangible personal property resold if the conditions in Subsection A of Section 3.2.205.10 NMAC are met.

(11) Example B3: F, an accountant, performs bookkeeping services for several clients. The accountant transmits various forms and papers to the clients in the course of providing this service. G, another accountant, runs short of certain forms and purchases some from F to tide G over until G's regular suppliers are open for business. F contends that, because F has sold to G tangible personal property by itself of the type sold to F's clients, two separate transactions occur with F's clients. F is not regularly engaged in the business of selling these forms. F's transactions with F's clients are not separable into distinct service and tangible components. F's transactions are predominantly the performance of a service.

(12) Example B4: H, who operates a computer hardware and software company, is hired to write computer programs for one of M's divisions, acquire and set up 25 computer stations for use of the division and to train the division personnel in the use of the stations and programs. H contends that the computer stations are sold to M and therefore H may execute Type 2 NTTCs to acquire them for resale. The transaction encompasses both the performance of services (developing the programs and training the division personnel) as well as the sale of tangible personal property (the computer stations) as separable elements. Therefore H may execute Type 2 NTTCs in acquiring the computer stations.

(13) See Paragraph (8) of Subsection A of Section 3.2.205.10 NMAC for transactions in which buyer regularly sells the tangible personal property by itself.

(1) In some cases, a transaction involving the performance of a service other than a construction or research and development service and the sale of tangible personal property may not be predominately either the performance of a service or the sale of tangible personal property, as for example where receipts attributable to each constitutes more than forty percent of the total receipts from the transaction. In such cases, if the market value or costs of the tangible personal property or services is readily ascertainable and if the taxpayer's records adequately reflect the portion of receipts derived from the sale of tangible personal property and the portion derived from the performance of services, the receipts may be apportioned accordingly. The burden rests on the taxpayer to provide that information, and to justify that the portion of receipts attributable to the sale of the tangible personal property or to the performance of services accurately reflects the relative market value or costs, including reasonably apportioned overhead, of the tangible personal property or services. The clearest way of carrying that burden is to specify separately on the invoice the charges for the property and the charges for the services, and to retain sufficient records to allow a determination that the relative value of either the property or the services is not overstated.

(2) Example 1: Taxpayer X enters into a contract with a governmental entity to maintain the entity's computer equipment. The contract obliges X to check and maintain the equipment, providing replacement parts such as toner cartridges on a regular basis, and to repair the equipment, including the replacement of broken parts. X bills the entity separately stating the charges for its maintenance and repair services and for the replacement parts. Receipts from the charges for replacement parts will be receipts from the sale of tangible personal property to a governmental entity and are deductible pursuant to Section 7-9-54 NMSA 1978. Receipts from charges for the services are not deductible.

(3) Subsection E of Section 3.2.1.29 NMAC does not apply to construction or to transactions in which prototypes or other tangible products of a service are transferred.