NM – Training and collaboration activities and related entity’s activities established nexus


Corporate members of an out-of-state limited liability company (LLC) that solicited sales in New Mexico were liable for New Mexico corporate income tax on income earned by the LLC because the New Mexico activities were not limited to sales solicitation, and the corporate members had sufficient nexus with New Mexico due to those other New Mexico activities and to the activities of a related corporate entity. The LLC’s income was attributed to its two corporate members because the members served as flow-through entities in a corporate organization owned by a foreign pharmaceutical company. Federal Public Law 86-272 prohibits state taxation when a taxpayer is engaged in the mere solicitation of sales and de minimis activities in the state. Taxation is permissible when nexus exists between the taxpayer’s activities and the state. In New Mexico, nexus exists when the activities performed in New Mexico by or on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in New Mexico.

In addition to soliciting orders from doctors, hospitals, and pharmacies, the LLC provided ongoing educational opportunities, textbooks, and training to doctor’s offices and collaborated with hospitals in treatment protocols. These activities were more than de minimis because they were not merely ancillary to pharmaceutical product sales. The pharmaceutical company’s North American headquarters had intercompany agreements with the LLC, under which the headquarters provided management and back office services. The headquarters also entered into a clinical research agreement with a New Mexico hospital and doctor that required any legal notice be sent to the LLC. The doctor did not distinguish between the headquarters and the LLC, thinking he worked for one company, the pharmaceutical company. Like the LLC’s additional activities, the headquarters’ activities in New Mexico also were not ancillary to product sales. Thus, state taxation was not prohibited. Furthermore, the activities of the LLC and the headquarters established nexus between the LLC’s members and New Mexico because those activities increased the LLC’s market in New Mexico. In the Matter of the Protest of Aventis Pharmaceuticals, Inc., New Mexico Taxation and Revenue Department, No. 17-23, May 19, 2017