News and Insights

New Mexico Taxation and Revenue Department Holds Oil and Gas Royalty Payments Component of Corporate Income Tax Property Factor

Tax Development May 02, 2011

The New Mexico Taxation and Revenue Department ("Department") recently released its decision in re of the Protest of Chevron USA, Inc., holding that oil and gas royalty payments are “annual rents” for purposes of calculating the New Mexico corporate income tax apportionment property factor.

New Mexico has adopted the three-factor income tax apportionment formula outlined in the Uniform Division of Income for Tax Purposes Act (UDIPTA). Further, New Mexico uses the UDIPTA method of valuing property rented, not owned. This method provides that a taxpayer calculates the value of rental property by multiplying the net annual rental rate by eight.

In support of its position that oil and gas royalty payments are not includable in the property factor, the Department cited to a Multistate Tax Commission (MTC) model regulation, under which “royalties based on extraction of natural resources” are specifically excluded from the definition of “annual rent.” Although New Mexico is an MTC Compact Member, the Department has not adopted this portion of the MTC model regulation. Emphasizing this fact, the Hearing Officer held that the oil and gas royalty payments at issue met the Department’s regulatory definition of “annual rents” as “any amount payable for the use of real or tangible personal property.”

As a result of this decision, New Mexico includes oil and gas royalty payments in its corporate income tax property factor.


Eric L. Stein