The Committee on Taxation was called to order at 1:30 p.m., on Thursday, March 11, 1999. Chairman David Goldwater presided in Room 3142 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Mr. David Goldwater, Chairman

Mr. Roy Neighbors, Vice Chairman

Mr. Bernie Anderson

Mr. Morse Arberry, Jr.

Mr. Greg Brower

Mrs. Vivian Freeman

Ms. Dawn Gibbons

Mr. John Jay Lee

Mr. Mark Manendo

Mr. John Marvel

Mr. Harry Mortenson

Mr. Bob Price

Ms. Sandra Tiffany

GUEST LEGISLATORS PRESENT:

Ms. Barbara Cegavske, Assembly District 5

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

The bill would allow the trade-in value of a used piece of construction machinery or equipment to be applied against the sales price of another piece of construction machinery or equipment for purposes of computing the applicable local sales taxes that were due on the transaction. In effect, the amount of the purchase price paid for by the trade-in was exempted from local sales taxes.

Chairman Goldwater asked Ms. Cegavske, as primary sponsor of the measure, to present her testimony and to introduce any witnesses she had.

Ms. Cegavske explained she had brought this bill forward, by request, and turned the floor over to Mr. Dayton Blaine who requested the measure. Mr. Blaine pointed out he was President of the Blaine Equipment Company which was the John Deere Construction dealer for the state and had been in Nevada in the construction business since 1980. He briefed the committee on his background in the construction equipment business.

In addressing the purpose of the bill, Mr. Blaine disclosed it would help suppliers compete with sellers located in surrounding states that had authorized a trade-in allowance, which they felt was unfair competition to Nevada dealers. Nevada required that a use tax be paid on such equipment when used for projects in the state regardless of where the equipment had been purchased. Mr. Blaine acknowledged that construction companies preferred to buy the equipment in a state that provided an allowance. He also noted the bill would give the same tax preference to the sales of construction machinery and equipment that was currently applied to motor vehicles, agricultural machinery and equipment.

Mr. Blaine concluded by explaining there were three issues that entered into the request for the legislation, one being quality, another double taxation and third present and future business.

Mr. Marvel asked that Mr. DiCianno, Deputy Executive Director from the Department of Taxation come forward as he had several questions. Mr. Marvel explained he had been a member of the Assembly Taxation Committee since

1979 and was aware the legislators had passed several bills like this. He emphasized the out-of-state pieces of equipment were subject to use tax and felt that was the purpose of the state auditors. They were authorized to track down the contractors Mr. Blaine had been speaking of and see that they paid the use tax during their time in Nevada. He felt they were liable for use tax and asked for an opinion from Mr. DiCianno. (Fiscal Note attached Exhibit C)

Mr. DiCianno concurred with Mr. Marvel explaining if an individual purchased equipment out of state, brought it into Nevada and used it in the state he would be subject to paying use tax. In the bill was a provision that this would not be construed as double taxation inasmuch as Nevada had a reciprocal credit agreement. The bill stated the purchaser would receive credit for the amount of difference in the tax they would have paid in another state versus Nevada, plus they would have to pay the additional use tax.

Mr. Marvel asked Mr. DiCianno if his department looked specifically for various types of taxable transactions and was assured they were aware of the necessity of doing that. Mr. Marvel indicated the problem the businesses in northern Nevada had was their close proximity to Idaho where they did not have sales tax on farm equipment and was one of the things Nevada had for several years. He pointed out many of his ranching constituents would go to Idaho to buy equipment but the Department of Taxation finally got wise to that and required out-of-state dealers to be licensed in the state of Nevada. The department’s auditors would audit the books of the dealers or check their invoices and collect either the sales or use taxes. Mr. Marvel indicated he would not argue the point one way or the other inasmuch as, at one time, there was not enough business selling farm equipment to make much difference but there was a use tax they would be subject to so they were not tax free.

Mr. Blaine pointed out, in the real world, there were many dealers who had been escaping. He admitted he did not know how they were doing it but if anyone went out and talked to a contractor they would find out. He suggested perhaps they should put "equipment" under the personal property tax. He pointed out their trucks were registered but the construction machinery was not. He stated some of the contractors had a resale number and were being audited just like he was all the time.

Mr. Lee asked if a construction company purchased a forklift or similar piece of equipment and wanted to trade it for land or some other item would that make a difference in this proposal. Mr. Blaine admitted he had no idea however if a person purchased the forklift to use on a construction job, he felt they would profit from the bill as the forklift would be considered industrial equipment.

Mr. Mortenson pointed out he had heard Mr. Blaine say if a person traded in an automobile the dealer would not have to pay tax on it and asked if that was an accurate statement, or were automobiles treated differently. Mr. DiCianno explained automobiles were treated differently as there were different provisions within the statutes dealing with trade-in allowances associated with sales of automobiles. Mr. Mortenson asked for the rationale for that provision and was advised, again by Mr. DiCianno, that was the wishes of the legislature due primarily to the competition within the automobile industry.

Mr. Goldwater asked about the subjective nature of valuing a trade and arriving at a net figure if the committee processed the bill; how would that be monitored when a trade in allowance was a subjective number. Responding Mr. Blaine explained the person involved would be paying on the net difference so it would not matter what the trade was. It could be $2,000 or $200 thousand it would not make any difference if they were paying on the net difference and added this was a very simple law which almost every state had. Mr. Goldwater asked if Mr. DiCianno agreed there would be no subjectivity to the trade in value to which Mr. DiCianno replied his department was neutral as far as the bill but insofar as subjectivity was concerned, Mr. Blaine was correct.

Mr. Goldwater asked if the definition of construction machinery was narrow enough that, if the committee were to process the bill, would the department be able to interpret it. Mr. DiCianno cautioned the committee that was one of the department’s concerns inasmuch as the term "construction" was not defined within the statute. The department would be required to hold work shops on regulations to define what was meant by "construction." He was uncertain how they would define "construction equipment" for example and would that include tools people bought as a handtool.

Chairman Goldwater asked Mr. Blaine if he had any thoughts on the definition of "construction machinery" and was advised there was a difference between tools and a piece of machinery. Machinery was a self-propelled mechanized unit with a motor or engine whereas a tool was a handheld piece of equipment with no motor or engine. The Chair asked Mr. Blaine to look at page 2, line 24. If the committee were to adopt this measure, would it be necessary to add the word "farm" and the conjunction then "for construction" and following down to line 26 "or equipment". Mr. Goldwater felt it may apply, according to his interpretation, to a hammer or something similar.

Entering into the discussion at that time was Mr. Mortenson who stated he was troubled that the legislature treated different things differently; it was like a form of discrimination against one group versus another group. Why do automobiles get preferential treatment over construction machinery or are there other categories that may define the differences. Mr., DiCianno disclaimed knowledge of any discrimination so he would not comment on that question, however, he suggested the committee look at the bill as the bill drafters had already defined "farm equipment" and "machinery" to begin with. The situation with auto sales would be a different criteria because of the competition within the business with which the legislature felt it had to deal. The definition of "construction machinery and equipment" was a concern of the Department of Taxation. It was not just the machinery they were concerned with but the equipment and how far should this go in dealing with exempting construction equipment when determining the local portion of the sales tax. The bill did not affect the 2 percent portion of the sales tax only the local portion.

Mr. Mortenson pointed out he was trying to find a definition for "construction" and if the measure would only pertain to farm or construction machinery, what about all other types of machinery. The committee was obviously going to treat other machinery differently from construction or farm machinery and asked if that was correct. Mr. DiCianno admitted as the bill was written, that was correct. Mr. Mortenson stated he was pointing out a suggestion for consideration that maybe the bill should say, "all machinery." He reiterated he did not understand why the law would treat different types of machinery differently because it could be construed as having a bias against someone who was using machinery that was not in a specific group.

The Chairman called upon Mr. Anderson for questions or comments. Mr. Anderson pointed out he had some concerns about whether the equipment would be difficult to identify. He asked about the type of problems relative to farming machinery and how it would be evaluated differently than construction machinery. He questioned how the Department of Taxation would handle that. Mr. DiCianno replied they would not have a problem as far as farm machinery or equipment were concerned as they would be tied very specifically to a specific type of operation. Construction equipment and machinery could be utilized across the board.

Mr. DiCianno explained the difficulty for his department was in trying to define what construction equipment was inasmuch as equipment could be purchased at different locations rather than having businesses selling only one type of equipment. Mr. DiCianno emphasized his department was concerned with clarification on types of equipment and/or machinery.

Mr. Lee interjected he had a question about the word "construction." If a construction company bought or traded something he could understand that, if a landscaping company came in and bought some equipment he could understand that but his concern was if the committee passed this legislation it should not encompass the world. The question from everyone was, "is there a way to exempt them out as the exemption could go on forever. The bottom line, in Mr. Lee’s mind, was that the same piece of equipment would be used for different purposes. Mr. DiCianno concurred with the concerns expressed by Mr. Lee and that was the reason his department had been asking for the clarification. The committee could either leave the language as it was in the bill or the department would be required to go through a regulation process hearing to try to determine the definitions themselves. If they had to go through a regulation process, any decision would be subject to appeal depending upon the circumstance of the individual buying any particular piece of equipment. That was, whether the equipment would be exempt or not.

Mr. Lee put forth his next question that being, if a construction company purchased a piece of equipment, not a maintenance nor a landscape company, would that make a difference inasmuch as usually maintenance companies do not get construction licenses and go through all those problems with the contractor’s board and so forth. Responding to Mr. Lee, Mr. DiCianno stated the way the bill was written it would not matter what that piece of equipment was being used for if it was "construction machinery and equipment" it would be exempt under the local portion of the sales tax.

Chairman Goldwater pointed out on every bill of this nature, Mr. Marvel gave an excellent dissertation on tax exemptions and this measure would be an absolute exemption. If it was the decision of the committee to process this bill, the members should consider Mr. Marvel’s words of advice. He then called upon Ms. Tiffany who had a statement.

Ms. Tiffany explained she had always hated "carve outs" but she had heard the argument in the proposed measure so after she wanted to ask Mr. DiCianno some questions. In particular, she noted the word "farm" in the measure and asked how his department would distinguish "farm" if they were having such a problem with distinguishing "construction." She added that sounded as abstract as "construction" to her. Mr. DiCianno replied that was a very good question and she was absolutely correct. The only concern of the department was that the issue was clear as far as implementing the provisions of the bill.

The Chair then called upon Mr. Price for his comments.

Mr. Price addressed his question to Mr. Blaine asking if he knew what the actual fiscal effect would be. As a citizen and a taxpayer, he asked where Mr. Blaine would suggest the legislature might look to make up those taxes that would be needed and would be lost through the sales of equipment. Would he suggest a business tax as it was understood the state needed money in order to operate the government. Mr. Blaine’s response was if the legislature did not pass the bill, they would have people buying machinery from out of state and the state would not get that money. He emphasized it was not a matter of making the revenue up from somewhere else, the state had better take care of what they had. Mr. Price agreed with the statements made by Mr. Blaine, explaining he had been in construction many years but he was very aware of the loss of revenue the measure would cause.

Mr. Marvel explained to Mr. Blaine he very much understood the rationale behind the bill and recalled that was the same problem they had with farm machinery. If there was some way the state could encourage purchasing locally that would be preferred. He hoped there would be some way the Department of Taxation could collect on the use tax for out of state purchases of machinery. Mr. Marvel pointed out he had the same problem in his district with the mining items. He assumed most of the purchases there had been outright purchases but no matter what happened as long as that piece of machinery was used in Nevada the purchasers were subject to the use tax. He stated he liked to look at equity and parity also but at the same time the state kept building a laundry list of exemptions. The state’s tax base was so limited but if it could be shown a bill such as this would actually generate more sales the increase in numbers would be shown as an offset.

Mr. Blaine advised the committee his business had people tell them after they bought equipment from them and saw the amount of sales tax, "we’re not going to do this again." They had actually had that happen. In the case of mining equipment it was working at a static situation; the mine was there and would not be moved, it would always be in the same location. In construction, machinery could be worked and moved 15 places in a month.

Wishing to testify at that time was Ms. Cheryl Blomstrom, Director, Associated General Contractors of America, stating for the record her board supported the bill. Chairman Goldwater posed his question, if the bill was passed in its present form, it appeared it would tend to favor buying from a dealer. It would make you want to do business with a dealer rather than between two construction companies inasmuch as you would get the tax break. He asked if Ms. Blomstrom’s organization had considered that and, once aware of the tax differences, would that still find favor with the officers of her organization. She admitted that aspect had not been part of their deliberations but she would bring it to their attention.

Ms. Carole Vilardo, President, Nevada Taxpayers Association testified her association had taken no position on the bill but she did want to respond to a prior question from Mr. Mortenson. She explained he had made his point on the equity issues that had been looked at here and had been raised by the committee. It was her understanding that the committee would have a vote similar to this on another bill dealing with boat trade-ins because of the vehicle situation. Trade-ins on boats were not considered nor did they consider trade in allowances on airplanes and a number of various things. The testimony heard at that hearing regarding surrounding states having those exemptions in fact was very true. It was in fact actually quite a major policy decision for the committee to make as to how far they would be willing to go. Most of the members of her association would love to see the bill passed as it was beneficial to economic development as well as being beneficial to the economic well being of those businesses. But she advised they would have a loss of revenue. There would be no question about that and would be a policy decision the legislators would need to deal with. If the bill was processed the committee might want to give some authority to the tax department or the tax commission to define some regulations dealing specifically with construction.

She also pointed out, for purposes of notification it would probably be helpful if the bill was not effective until October 1. The reason being that would give the Department of Taxation time enough to be prepared because any change the legislators made, the responsibility would be the Department of Taxation to notify all businesses. Her association would strongly urge the committee to change the effective date to October 1^st.

Ms. Freeman reminded those present this was her first session on taxation but she had been in the legisltature for a number of years and had been living in Nevada when the tax shift occurred in 1981. She found it a real tragedy that the state depended so heavily on sales tax. She acknowledged, however, there were so many legitimate businesses and groups who deserved an exemption but because of the effect on local governments and schools the state could not afford to allow this. She recalled in the Governor’s State of the State address he promised a study of the tax system would be done and she trusted he would do what he promised. She added she wanted to be able to vote for the measure but she would not because of the revenue problems and she felt very badly about that.

The Chair recognized Mr. Mortenson who pointed out this reminded him of the medical exemptions; every year someone comes in for a new exemption and one by one we were approving them. As far as he could see the same thing was happening here, i.e., the boat owners, airplane owners, dog catchers, the well drillers and so forth. One by one those groups were going to see they were getting the short end of the stick and they would be coming to the legislature to get an exemption. He felt it was a policy issue and somebody should make a decision; were there going to be exemptions for everybody or would the state exempt no one. He felt a decision should be made.

Mr. Lee joined the discussion stating he felt the legislature would be taking the wrong attitude if it felt anytime anyone came up with a tax relief question that the decision had been made and that was it; he felt taxes were one thing that should be discussed. He felt the citizens were oppressed with taxes and bringing those requests for exemptions forward made a lot of sense to business owners, construction companies, and busines’s that employ people. He thought owning a business in Nevada was a privilege as welll as a necessity and felt the legislators should do everything they could to keep people in business and do what we could to relieve taxation. He did not feel the Committee on Taxation should just say the exemption was bad no matter what. When people brought requests forward they made a lot of sense and if the legislature was going to take this away from them, let’s just shut the barn door on everyone but we cannot do that.

The representative from the Associated Builders and Contractors of Southern Nevada, Mr. Steve Hill, spoke next stating his group was very much in favor of the legislation and proceeded to explain how the measure would work. His association had a sister company in Utah where the laws allowed the same proposal to happen. It was very easy for his sister company in Utah to own the equipment they use. Most of the competitors were owned by national companies and they have operations in other countries as well as many other states. They had the ability to own the equipment under title or, in the case of construction equipment in another state, they had the ability to buy it there. They also had the ability to transfer the equipment twice a year which became a very big consideration as to where they purchased the equipment. So there may be some lost revenue on the trade-in side but he thought the revenue would be more than made up on the purchasing side. His association did support passage of the measure.

Chairman Goldwater pointed out to Mr. Hill if, hypothetically, the measure was processed it would reduce the incentive for Hill Construction to sell to Goldwater Construction because there would not be the trade-in allowance and it would increase an incentive to go through a dealer. He asked Mr. Hill if his association had considered that during the analysis of the bill. Mr. Hill conceded it was something they had considered but admitted they had not directly sold a piece of equipment in several years and they sold almost everything at the current time through a dealer so it would not affect his company.

The Chair, recognizing there were no further members of the audience wishing to testify announced the committee would hold action on the bill and would take it up again at a work session. He thanked Ms. Cegavske for bringing the bill to the committee and closed the hearing on A.B. 389.

He reminded the committee April 9^th was the deadline for moving all bills out of the committee so he suggested the committee make an effort at a work session to pass the bille or kill them prior to that date.

There being no further business to come before the committee, the meeting was adjourned at 2:35 p.m.

RESPECTFULLY SUBMITTED:

Nykki Kinsley,

Committee Secretary

APPROVED BY:

Assemblyman David Goldwater, Chairman

DATE: