The Committee on Taxation was called to order at 2:00 p.m., on Tuesday, April 27, 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:

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

C.O. Watson, Director, Nevada Association of Tobacco and Candy Wholesalers

Amy Hill, Representative, McMullen Strategic Group, Phillip Morris U.S.A.

Markos Mendoza, Shareholder, Landmark Cigar Distributors

Tina Spaniazi, Representative, Landmark Cigar Distributors

Mary Lau, Executive Director, Retailers Association of Nevada

Steve Moran, Member, Retail Association of Nevada, Reno/Sparks Indian Colony

Paula Berkley, Representative, Reno/Sparks Indian Colony

Dino DiCianno, Deputy Director, Department of Taxation

Jack Jeffrey, Representative, Brown & Williamson Tobacco

Robert Barengo, Representative, NTD, Inc.

Tom Ghyczy, Vice President, NTD Inc. of Las Vegas

Fred Hillerby, Representative, NDT of Nevada

Matthew Fairshter, Attorney, Fairshter & Associates,

Harvey Whittemore, Representative, RJ Reynolds Tobacco Company

Nisim Gadot, Representative, Dude Enterprises

Dan Geary, Representative, American Cancer Society

Maureen Brower, Representative, American Heart Association

Peter Kruger, Representative, Nevada Petroleum Marketers and Convenience Store Association

Paul Bancroft, Representative, Sim-Tex Construction Products, Nevada Cement

Darryl Capurro, Representative, Nevada Motor Transport Association

Joe Guild, Representative, Union Pacific Railroad, Burlington Northern Railroad

Ray Bacon, Representative, Nevada Manufacturing Association

Terry Graves, Representative, Pioneer Chlor Alkali, Nevada Taxpayers Association

Steven Horsford, Representative, America West Airlines

Stephen Smith, Vice President, Sierra Nevada Stage Lines and Frontier Tours

John Sasson, Representative, Washoe Legal Services

Bobbie Gang, Representative, Nevada Women’s Lobby

Jan Gilbert, Representative, Progressive Leadership Alliance of Nevada, League of Women Voters

Madelyn Shipman, Assistant District Attorney, Washoe County District Attorney’s Office

Karen Mullin, Director, Washoe County Parks Department

Following roll call, Chairman Goldwater opened the hearing on S.B. 244.

C.O. Watson, director, Nevada Association of Tobacco and Candy Wholesalers, testified in support of S.B. 244. Mr. Watson presented a packet to the committee (Exhibit C) which documented complaints filed by the association against various businesses for violation of Nevada Revised Statute 370 covering the wholesale distribution of cigarettes and other tobacco products in the State of Nevada. Mr. Watson explained a letter from Linda Fleischmann, tax administrator, Nevada Department of Taxation was also included in Exhibit C which acknowledged the complaints, along with a letter from Ms. Fleischmann to all Nevada cigarette wholesalers setting forth the "gray market cigarette" situation. The term "gray market" referred to products which were manufactured for export but were brought into the United States by third parties for domestic sale.

Mr. Watson explained cigarettes made for export were entirely different products than those manufactured for sale in the United States. The "gray market" cigarettes were being sent out of the country as exports and being brought back in illegally. Because of the difference in the product, such a practice could seriously harm the reputation of a certain brand name.

Assemblyman Marvel asked where the cigarettes were made. Mr. Watson replied they were made in the United States but were made from a different mixture of product.

Amy Hill, representative, McMullen Strategic Group, Phillip Morris U.S.A., testified in support of S.B. 244. She gave the committee a handout pertaining to her testimony (Exhibit D). Ms. Hill explained the cigarettes in question were manufactured in the United States, but they were meant for export only. There were certain restrictions and labeling requirements for such cigarettes. Assemblyman Marvel asked about the difference in pricing of those export only cigarettes. Ms. Hill did not have specific information on what the manufacturers charged foreign distributors, but the gray market cigarettes coming back into the United States were sold for 25 to 30 percent less than the normal retail price. They were certainly cheaper for kids.

Assemblyman Mortenson asked about how taxes were affected. Ms. Hill said it appeared the people who sold gray market cigarettes did pay taxes. They paid a federal excise tax when the cigarettes were returned to the United States and a license from the tax department was required in order to sell the cigarettes in Nevada. The question was who could verify the existence of such a license.

Ms. Hill explained she was more concerned with how the practice would affect the multi-state cigarette settlement. As the committee knew, the payments to be received by Nevada were based on the volume of domestic sales of cigarettes. Cigarettes being sold through the gray market did not count towards those sales because they were intended to be sold outside the country. There was no record of their domestic sale ever having occurred.

Yet another concern, according to Ms. Hill, was the quality of the gray market cigarettes. Those manufactured for United States consumption were produced with a certain blend of ingredients, while cigarettes destined for China, for example, would have a different blend depending on the tastes of the local consumers. The United States consumer was being deceived, since they were not aware that the cigarettes they purchased were gray market. Also, the gray market created an unfair competitive advantage for those who tried to find a loophole in the federal and state tax system. The Federal Government had decreed gray marketing of cigarettes to be illegal starting in January 2000. It was important to pass S.B. 244 immediately so the state did not become a haven for gray marketers during the interim. Similar legislation was pending in 21 other states, and California, Colorado, Montana, and Wyoming had already passed such laws. In the case of California, since the multi-state settlement, over 30 percent of the cigarette sales were either gray market or black market sales.

Assemblyman Marvel asked how S.B. 244 would affect the Native American smokeshops. Ms. Hill deferred the question to a representative who would testify later in the hearing.

Markos Mendoza, shareholder, Landmark Cigar Distributors, testified against S.B. 244. Mr. Mendoza said the company was family-owned and had been in business for about 5 years.

According to Mr. Mendoza, S.B. 244 was meant only as a means for the state government to help large corporations like Phillip Morris squash little companies like Landmark. The product in question had all required labels, and all state and federal taxes were paid. When Landmark received its wholesale license the owners were told the cigarettes labeled for export were also for legal sale in Nevada as long as all taxes were paid. Landmark made a substantial investment in machinery, product, tax stamps, and employee training only to find that S.B. 244 would pass and be put into effect immediately. Landmark sold to more than 400 retailers, and employed 10 people. The retailers employed over 2,000 people. S.B. 244 directly affected those lives. The product was sold at Wal Mart, Costco, and most of the significant casinos throughout Nevada.

Tina Spaniazi, representative, Landmark Cigar Distributors, testified in opposition to S.B. 244. Ms. Spaniazi said she was an owner of a small business that sold cigarettes. The business was legitimate, paid all its taxes, and the owners were honest, hard working citizens of Nevada. They were not smugglers or bandits of any sort. If S.B. 244 passed, it would devastate hundreds of employees and their families. The bill was not about a general concern on the part of companies like Phillip Morris, it was about price competition.

Assemblyman Anderson asked what Ms. Spaniazi’s company would do after January, 2000, when the Federal Government stopped the importation of the type of tobacco she sold. Ms. Spaniazi replied she was aware of that legislation, and was preparing for that. However, if the bill passed immediately, it would put her out of business. At least, if she had until January, 2000, she would be able to regroup and prepare for the next move.

Assemblywoman Freeman said she wondered why wholesalers would buy manufactured tobacco in the states, ship it out of country, and then ship it back. She asked what benefits came to the wholesaler through those maneuvers.

Ms. Spaniazi replied there was a much better price break and they were able to compete with the larger companies. She said she had tried to get in contact with a number of large wholesalers like Phillip Morris and RJ Reynolds to distribute their products and had not received return calls.

Mary Lau, executive director, Retail Association of Nevada, testified in support of S.B. 244. Ms. Lau said a lot of the members had been mentioned in previous testimony and had signed on in support of the bill. She introduced the next speaker.

Steve Moran, member, Retail Association of Nevada, Reno/Sparks Indian Colony, explained re-imported cigarette wholesalers did not collect money from retailers to fund the tobacco settlement. To the extent the market share of participating manufacturers declined, the payments to the Attorney General for that tobacco settlement also declined. By not participating in the settlement, re-imported cigarette wholesalers could discount cigarettes by $4.50 a carton. The tobacco in re-imported cigarettes was inferior, and misrepresented as being the same quality as those made for sale in the states. It was like selling watches as Rolexes when they were not Rolexes.

Mr. Moran addressed the question of how the Native American tribes were affected. To his knowledge, he said, gray market cigarettes were not an Indian issue. He knew of only one tribe who sold those cigarettes in Nevada. As with other retailers who sold them, that tribe was selling them legally at the moment and would not be selling them legally in January, 2000. The vast majority of sales were from non-tribal outlets, such as Cigarettes Cheaper, a national chain with 20 locations in Las Vegas. He spoke with the general counsel of the Las Vegas Paiute tribe, who told him that if S.B. 244 passed, the tribe would provide 100 percent compliance. The tribe had not given anyone authorization to speak for them in the present hearing. Tribal enforcement of the new provisions would be handled at the wholesale level so there would be no conflict between the tribe and the state. Mr. Moran continued the Federal Government was closing the loophole as of January, 2000, which was not soon enough as far as he was concerned. He urged immediate passage of S.B. 244.

Assemblyman Mortenson asked Mr. Moran to explain the economics of the issue. He did not understand how it was cheaper to bring cigarettes from out of the country back in and still make a profit.

Mr. Moran replied when cigarettes were manufactured, they were placed in two separate piles. When domestic cigarettes were made, the Internal Revenue Service received $2.40 per carton. Cigarettes for export were sent to a bonded warehouse and no federal tax was collected. They were then shipped to another bonded warehouse in another country. When they came out of that warehouse for distribution, the country’s excise tax was then paid. If the tax was not paid, the cigarettes were considered black market, if it was paid, they were gray market. The tobacco settlement caused higher prices and therein lay the profit.

Paula Berkley, representative, Reno/Sparks Indian Colony, testified in support of S.B. 244. She said another aspect of the gray market was volume. The cigarettes came back into the country in very large lots. They went to a very specialized market. She said the significance to Nevada was that the decreases in the market through those sales meant a decrease in the tobacco settlement.

Ms. Berkley read the prepared statement of Anne Cathcart, special assistant attorney general, Nevada Attorney General's Office, (Exhibit E) into the record which expressed support of that office for S.B. 244. Both Ms. Cathcart and Nevada Attorney General Frankie Sue Del Papa signed the statement.

Assemblyman Neighbors asked about the fiscal impact of S.B. 244.

Dino DiCianno, deputy director, Department of Taxation, responded there would be no additional fiscal impact other than notification costs of $75, since all stamps would have to be purchased and placed on the cigarettes in order to sell them.

Assemblyman Mortenson asked the cost of the required stamps. Mr. DiCianno replied he was not sure, but he did know it depended on where in the state the cigarettes were sold. He would be happy to provide a breakdown to the committee at a later date.

Assemblyman Price stated a number of locations were exempt from tax to begin with, such as military bases. He wondered if that fact would shift the market for gray market cigarettes to those places. Mr. Moran responded that was certainly a possibility, and for sure would affect the tobacco settlement. Ms. Berkley interjected if California had already passed the law and other surrounding states had pending legislation along the same vein, Nevada would be the only western state where gray market cigarettes could be sold.

Assemblywoman Freeman wondered if there was any discussion in Washington, D.C. about investigating and prosecuting tobacco companies that deliberately shipped inferior products to other countries. Ms. Lau explained the term "inferior" was mostly a result of individual taste. Countries differed in their likes and dislikes. For example, Italian coffee was much different than coffee in America, and while the American citizen felt Italian coffee was "inferior", the Italian citizen felt that way about American coffee. Products were marketed for the taste of the region in which they were sold. Gray market cigarettes were not what the American people thought they were getting when they purchased a certain brand. Marlboro cigarettes in the United States were very different from those produced for out-of-country sale, but it was a matter of taste and expectations.

Assemblywoman Tiffany said she did not understand the necessity to visit the gray market issue twice; once at the present time and once 6 months later. If the business was legitimate and taxes were paid, the companies should be left alone. In 6 months, when the laws changed, then was the time to focus on enforcement of the new law.

Ms. Berkley responded the reason for concern was the loss of tobacco settlement money. Assemblywoman Tiffany replied there was no justification for such an argument. The excuse of the tobacco settlement, which was not even "real" yet, did not support the fear that the loss of as-yet-unrealized funds would be the result of allowing legitimate businesses to stay open for another 6 months at most. She wanted to see some proof that tobacco settlement money would be lost, and how much would be lost, as a result of not passing S.B. 244. Ms. Berkley said she would provide that information.

Assemblywoman Tiffany asked why S.B. 244 had to be passed if the Federal Government had outlawed the practice in January 2000 anyway. She saw that as double action on the same issue.

Mr. Moran replied it was not double action, there were two governments involved; the state government and the Federal Government. The tobacco settlement applied to state governments. The Federal Government had no vested interest in the tobacco settlement, and the states did. That was the reason so many states outlawed gray market cigarettes. If Nevada did not outlaw the practice, it would have a definite effect on the tobacco settlement money.

Chairman Goldwater asked Assemblywoman Tiffany to repeat her question for Ms. Hill. Assemblywoman Tiffany asked again what empirical data existed to indicate why legislation needed to be passed immediately, in light of the fact that the Federal Government had outlawed gray market cigarettes effective January 2000.

Ms. Hill responded the issue was a new arena, and she could not state if S.B. 244 did not pass, the result would be a loss of some unknown percentage of the tobacco settlement money. She continued the fact was 7 states had outlawed the practice, and another 21 were considering it, including Nevada. Attorneys General in those states were some of the biggest advocates for the passage of such a law because of concern over what had happened in California; that being the 30 percent gray or black market share of cigarette sales.

Assemblywoman Tiffany said she did not think Nevada was even close to the figures in California, and there were only 6 months left for the practice to continue legally anyway. She did not see that Nevada would reach those figures in only 6 months. She was concerned by the idea of immediately taking away the livelihood of people who would lose it in any event in the near future.

Ms. Hill reminded the committee passage of a federal law did not guarantee enforcement of that law. She expressed concern if S.B. 244 did not pass, and federal law was not enforced, Nevada would have to wait until the 2001 legislative session to correct the situation.

Assemblywoman Tiffany said another concern was why the state did not just focus on enforcement rather than duplicating the work of the Federal Government.

Jack Jeffrey, representative, Brown & Williamson Tobacco, commented Assemblywoman Tiffany had asked the right question. The answer was there was concern about enforcement, but the only way the state could enforce the law was if the state passed the law. Experience had shown federal law could not be enforced by the state. For example, Occupational Safety and Health had a federal program which the state adopted because there was no enforcement on the federal level. The same applied to the apprenticeship programs.

Assemblywoman Tiffany pointed out that the Fair Housing Act was federal, as was the Americans with Disabilities Act, and those programs were definitely enforceable. She said the issue as far as she was concerned was enforcement in January 2000.

Mr. Jeffrey repeated the points already discussed regarding the cost to the settlement fund. Assemblywoman Tiffany repeated her concern for enforcement rather than duplication of effort with S.B. 244.

Robert Barengo, representative, NTD, Inc., testified in opposition to S.B. 244. Mr. Barengo introduced Tom Ghyczy, a cigarette importer, and Matthew Fairshter, who represented another company who had been involved in the gray market cigarette issue in several states.

Tom Ghyczy, vice president, NTD Inc. of Las Vegas, testified against S.B. 244. Mr. Ghyczy explained the company was a distributor/importer of tobacco products. He supplied the committee with a letter (Exhibit F) from Joanne Tornburg, chief operating officer, Nevada International Trade Corporation, in support of S.B. 244. Mr. Ghyczy explained the process began with the purchase of products intended for export from distributors offshore who were authorized to receive and sell the product. The product was then re-imported to the foreign trade zone. The merchandise was shipped and held in bond at the foreign trade zone. The goods were held in bond, with no taxes paid at the zone. They were then cleared with U.S. Customs and the appropriate federal taxes paid. NTD, Inc. was licensed in Nevada and approximately 30 other states as tax stampers.

Assemblyman Anderson asked if NTD, Inc. could ship product from a foreign trade zone into Nevada and then use Nevada as a distribution hub to supply other states with gray market cigarettes. Mr. Ghyczy replied that was possible provided NTD was licensed in that state and the taxes were paid.

Assemblyman Anderson said one of the allegations heard in the meeting was the potential for gray market cigarettes flooding the Nevada market. He asked if it was possible to buy cigarettes from states where the practice had been outlawed and put back into a bonded warehouse after they reach the streets. He also wanted to know if a substantial backlog of product had been built up in anticipation of the deadline set by the Federal Government. Mr. Ghyczy replied the sale of cigarettes from other states in Nevada could not happen, because the appropriate tax stamp would be applied. He had not purchased a large amount of product. His company purchased supplies on a continual basis. There would be little purpose in buying ahead of time since the legislation would be set in place in the very near future to outlaw the sale of that product.

Chairman Goldwater commented the real question was not whether the practice was illegal, but whether it should be made illegal immediately instead of waiting until January 2000, and whether the gray market cigarette companies should be paying part of the tobacco settlement.

Fred Hillerby, representative, NDT of Nevada, responded to questions by Assemblyman Mortenson regarding taxes and fiscal impact. Mr. Hillerby said there would be a fiscal impact in terms of lost tax revenue.

Chairman Goldwater said the proponents of the bill also indicated that besides lost revenue for the tobacco settlement there was also an effort by dealers in gray market cigarettes to be less sensitive toward sales to minors than other companies. Mr. Barengo responded the gray market cigarette companies were wholesalers, did not sell to the general public and could not possibly sell to minors. The companies assumed that the applicable laws of the State of Nevada applied to all retailers, whether they were selling gray market or regular cigarettes. They would still have to comply with all the laws in the state and would be subject to the prohibitions of those laws.

Matthew Fairshter, attorney, Fairshter & Associates, testified in opposition to S.B. 244. He said he represented several companies in Nevada and had been involved in various state legislatures which had considered the issue. The settlement agreement contained a provision called Exhibit T. Exhibit T provided that the state legislatures were supposed to pass what was called an escrow fund. Anyone who imported products called by the misnomer gray market, would be required to pay into that fund. The escrow fund was designated to be able to remit payments for the particular issue known as the "gap" issue. Such legislation was not drafted as part of the national settlement agreement. It came later in a cooperative effort between certain parties of the National Association of Attorneys General and Phillip Morris. Phillip Morris drafted the legislation. Phillip Morris had made threats, as witness statements made by the attorney general in Louisiana, that if the legislation was not passed there would be no tobacco settlement funds given to the state. The national settlement agreement eliminated areas of competition such as advertising on billboards and in magazines.

Mr. Fairshter continued because those avenues would be outlawed in January of 2000, the retail store level would be the only area of competition still in existence. The committee should know the RJR Tobacco Company, Brown and Williamson, and Lorilar had all sued Phillip Morris in North Carolina for antitrust issues. Phillip Morris had 49 percent of the American market.

Mr. Fairshter continued the United States Supreme Court had defined gray market goods as being foreign manufactured goods. The cigarettes in question were manufactured in the United States, shipped overseas and returned, and therefore were not gray market goods by definition. Another fallacy presented to the committee was that the Federal Government had outlawed the practice beginning in the year 2000. Title 26, United States Code, Section 5754 was passed to make sure excise taxes were paid. The goods were held, not just in a bonded warehouse, but in a segregated federally licensed facility. Federal facilities were used because the cigarette cartons did not have the Surgeon General warning on them. The cigarettes were brought into the foreign trade zone in order to affix that warning to the product, since they could not be sold without it. They could not be sold without filing with the Department of Health and Human Services on the ingredients list.

Assemblyman Price asked if the statement in the Attorney General's Office’s letter that "the sale of gray market cigarettes has the effect of reducing the nationwide market share of tobacco companies, which have joined in the master settlement agreement," was an untrue statement. Mr. Fairshter replied Exhibit T to the master settlement provided for the escrow fund arrangements. That legislation had been proposed in 37 states so far, and had been enacted into law in about 12 of those states. It was part of the original formulation under the settlement agreement to make sure the gap was filled. So the statement in the letter was inaccurate. Mr. Fairshter said he felt safe in stating the Nevada attorney general had probably not been at meetings in Washington, D.C. with Phillip Morris and the justice department when the legislation was drafted. It was not that the attorney general was purposely misleading, it was that the attorney general was being misled.

Assemblyman Price asked the purpose of Title 26 of the Internal Revenue Code. Mr. Fairshter stated 5754 required the "for export only" label placed on cigarettes was not intended to differentiate between those cigarettes and those intended for sale in the United States. There was no difference in the product. The label on the cigarettes meant excise taxes did not have to be paid. The statute number 5754 stated that 26 United States Code 5704 must be complied with. 5704 was enacted in August 1997, and had nothing to do with the tobacco settlement. The actual basis for 5704 was that a group of Alcohol, Tobacco and Firearms people in Miami thought they found a way to handle a variety of import/export problems.

Assemblyman Mortenson asked if Nevada needed to pass legislation to ensure funds would be placed in an escrow account. Chairman Goldwater reminded the committee a bill had passed legislation in A.B. 667 which required all manufacturers of tobacco products to participate in settlement with the state or to place money in escrow.

Assemblyman Brower commented he was concerned about the impact of the federal legislation referenced. The Wall Street Journal article (see Exhibit F) had clearly suggested that the law with respect to cigarettes would change as of the year 2000. The Journal article said "For cigarettes, though the law soon will change, the 1997 balanced-budget act imposes stiff fines on anyone caught selling or distributing diverted tobacco products as of 2000." Mr. Fairshter repeated the practice would not be outlawed. There would be no fines. The Federal Government had not passed a law that would take effect in 2000 to change or outlaw the practice of gray market cigarettes.

Chairman Goldwater asked if Mr. Fairshter anticipated litigation in the issue. Mr. Fairshter replied that would probably be the case. The ATF was going to issue regulations and that was where the litigation might begin. The Journal article was written on information provided by Phillip Morris to the reporter. Mr. Fairshter had asked the reporter how she could print the information, and she replied that was the information she had received from Phillip Morris.

Harvey Whittemore, representative, RJ Reynolds Tobacco Company, testified in support of S.B. 244. Mr. Whittemore said he believed the intent of the legislation put into question whether or not the practice of selling gray market cigarettes would be legal after January 2000.

Nisim Gadot, representative, Dude Enterprises, opposed S.B. 244. He repeated prior testimony of others in opposition to the bill. He said his business was already being damaged by bad information, and asked the committee to support the small businessmen.

Dan Geary, representative, American Cancer Society, testified in support of S.B. 244. Mr. Geary commented it was rare to see the tobacco manufacturers and the public health community to support each other on a bill. He felt allowing sales of gray market cigarettes would be highly detrimental to the health of young people and to the elderly. Cheaper brands were more affordable and therefore more attractive to those groups. He urged passage of S.B. 244.

Maureen Brower, representative, American Heart Association, spoke in favor of S.B. 244. Ms. Brower presented a written copy of her testimony (Exhibit G) which repeated testimony just presented by Dan Geary. She urged support of the bill.

Peter Kruger, representative, Nevada Petroleum Marketers and Convenience Store Association, testified in support of S.B. 244. He referred to the "we card" seminars conducted to prevent the sale of tobacco to underage customers. He did not recall any of the people who had testified in opposition to the bill ever having attended any of those seminars. Further, he had been advised the State of Nevada must have a companion bill such as S.B. 244, in order to enforce the January 2000 federal legislation, which was why he supported it.

Chairman Goldwater asked for other testimony on S.B. 244, and hearing none, closed the hearing on S.B. 244, and opened the hearing on S.B. 262.

Paul Bancroft, representative, Sim-Tex Construction Products, Nevada Cement, testified in support of S.B. 262. He gave the committee a letter (Exhibit H) from the Equipment Leasing Association of America, also in support of S.B. 262. Mr. Bancroft said S.B. 262 clarified and made certain sales-and-use tax treatment of property purchased or leased outside Nevada for use in interstate commerce.

Mr. Bancroft said under the sales-and-use tax law the acquisition of tangible personal property outside Nevada would only be subject to a use tax if at the time of acquisition the purchaser intended to use the property in Nevada. That was not an exemption, but was a recognition that Nevada use-tax did not apply to property purchased for use outside Nevada. The application of the rule required an examination of the factual circumstances at the time of purchase. The purchase or lease of such property as trucks, railcars, aircraft, and motor coaches was generally for use in multi-state systems of transport.

Mr. Bancroft continued the Nevada Department of Taxation had only assessed the use tax on mobile property acquired outside Nevada when the properties were put to first functional use in Nevada. In order for the property not to be subject to use tax in Nevada, it must fulfill 3 criteria:

• The purchase must occur outside Nevada.
• The property must be used initially outside Nevada
• The property must be used continuously for the subsequent 12 months of purchase in interstate commerce, but not exclusively in Nevada.

Mr. Bancroft continued S.B. 262 would not affect such property taxes as railroad line-mileage. S.B. 262 did not change existing law, it simply codified existing practice.

Darryl Capurro, representative, Nevada Motor Transport Association, testified in support of S.B. 262. He explained S.B. 262 would codify the current Nevada Department of Taxation policy. The concern was that policy could change, and stability was needed to operate in an interstate atmosphere, especially as Nevada was a bridge state with heavy commerce to the West. Mr. Capurro gave the committee a map (Exhibit I) which indicated tax policy in other states. He urged passage of S.B. 262.

Assemblywoman Tiffany asked if there were problems with the tax commission in Nevada regarding the property. Mr. Bancroft explained it was difficult to apply a standard approach to determine when something should be taxed, which resulted in several expensive and time-consuming audits to determine the question.

Assemblywoman Tiffany requested clarification of the sections in the bill. Mr. Capurro explained section 1 dealt with Nevada Revised Statute Chapter 372, which was the Sales Tax Act. Mirror language was necessary in Nevada Revised Statute Chapter 374, which were optional county taxes, school support taxes, and such matters. In those two sections the language had to be equivalent. In both sections, the language was new, but essentially it codified the current policy of the tax department.

Assemblywoman Tiffany asked if S.B. 262 would help to clarify questions during an audit. Mr. Bancroft said it would help both the department and the taxpayers to plan transactions and reduce the number of audits. The tax department had assisted in drafting S.B. 262.

Mr. Kruger explained the members of the Nevada Petroleum Marketers were large users of rolling stock. He said S.B. 262 would go a long way to clarify issues where an audit had been called for. He supported S.B. 262.

Joe Guild, representative, Union Pacific Railroad, Berlington Northern Railroad, expressed complete support of S.B. 262.

Ray Bacon, representative, Nevada Manufacturing Association, added his support of S.B. 262. Mr. Bacon said his organization had a case where railcars that had never even come into the state were questioned as to whether or not they should be taxed because the corporation owned railcars that were scattered throughout the country.

Terry Graves, representative, Pioneer Chlor-Alkali, expressed support of S.B. 262. Mr. Graves said as a manufacturer in southern Nevada, Pioneer Chlor-Alkali operated a large railroad fleet, and had done so for 40 to 50 years. He told the committee he had been asked by Carole Vilardo to tell the committee the Nevada Taxpayers Association also supported the bill.

Steven Horsford, representative, America West Airlines, said he supported S.B. 262, as did Keith Lee, representative of the Air Transport Association. Mr. Lee was not able to attend, but asked Mr. Horsford to offer his support to the bill.

Stephen Smith, vice president, Sierra Nevada Stage Lines and Frontier Tours, expressed his support of S.B. 262. He said his company had gone through an audit that cost about $60,000 in attorney’s fees, and approximately $15,000 in in-house staff time, to determine a result exactly as indicated in S.B. 262.

Chairman Goldwater asked for further testimony on the bill, and hearing none, closed the hearing on S.B. 262 and opened the hearing on S.B. 403.

Senator Maurice Washington, Senate District 2, testified in support of S.B. 403. Senator Washington told the committee S.B. 403 came into being because businessmen in his district who had expressed the opinion the current statutes were unfair to them since they could not provide childcare or a voucher to anyone 150 percent below the poverty level. Testimony had been given that to those people were being at the 150 percent level so businesses could take advantage of the exemption. Such was not the case, and the Senate Taxation Committee felt the exemption was unfair across the board and asked for an amendment to the entire statute to leave the tax exemption out altogether. The intent of S.B. 403 was to make the exemption applicable to employers who hired any employee under the 150 percent poverty level so as to make it fair to all businesses.

Assemblywoman Tiffany asked if S.B. 403 would conflict with another bill passed out of the Assembly Committee on Taxation to provide a tax exemption for personal property if an employer provided such childcare. Senator Washington said he did not believe that would be the case, but he was not sure. The Senate Taxation Committee was opposed to any exemptions at all, but the purpose of S.B. 403 was to create incentives for businesses to hire recipients who were under the 150 percent poverty level, whether they supplied childcare or not.

John Sasson, representative, Washoe Legal Services, testified in opposition to S.B. 403. Mr. Sasson said S.B. 403 as it passed in the Senate was completely different from that being described by Senator Washington. He had tried to expand tax exemptions for childcare in the Senate and had actually taken a step backward in that hearing. S.B. 403 originally would have eliminated the tax exemption and the BAT tax proposed by Senator Kathy Augustine for persons who provided childcare either on-site or as a voucher system. Senator Washington wanted a tax exemption to hire low-income workers. Unfortunately, the bill did not reward people for hiring low-income workers, it was drafted to provide an exemption so long as the wages were kept below 150 percent of poverty level. That was not the Senator’s intention, but that was how the bill came out. He had worked with Senator Washington on new language, and with that language presented, the Senate Taxation Committee had no appetite to expand the exemption, but rather the committee wished to get rid of the exemption altogether.

Mr. Sasson continued the exemption for childcare was a good thing. It had not been utilized much, but businesses that took responsible action and provided childcare should be supported. He would hate to see the exemption removed before it had a chance to work.

Bobbie Gang, representative, Nevada Women’s Lobby, testified in opposition to S.B. 403. Ms. Gang presented a written copy of her testimony to the committee (Exhibit J). She also represented two other organizations who were in opposition to the bill, the Nevada Association of Social Workers and the American Association of University Women of Nevada. It had been very difficult to get the childcare exemption passed in the 1997 Legislative session, and Ms. Gang felt the little bit that had been gained was very important to maintain. Childcare benefits were critical for low-income families in Nevada. Nevada had one of the highest single-parent household numbers in the nation, with some of the lowest-paying jobs. Those families needed the childcare benefit to stay off the welfare rolls. Tax exemptions were a sensitive topic, but the childcare issue was a perfect example of good public policy. She urged the committee not to pass S.B. 403.

Jan Gilbert, representative, Progressive Leadership Alliance of Nevada, League of Women Voters, spoke next in opposition to S.B. 403. She reminded the committee there was a waiting list of 4,000 children in Nevada waiting for childcare assistance. All of those children came from working families. It was imperative for Nevada to continue to find ways to support families who needed childcare, not to close an avenue of opportunity it was so difficult to open to begin with. She urged the committee not to pass S.B. 403.

Hearing no further testimony on the bill, Chairman Goldwater closed the hearing on S.B. 403, and opened the hearing on S.B. 408.

Madelyn Shipman, assistant district attorney, Washoe County District Attorney’s Office, told the committee S.B. 408 had no opposition among local governments. Current law authorized a park tax to be imposed on mobiles, based on the actual cost of construction of the mobile lot. S.B. 408 would change the definition of "mobile home" and would revise the residential construction tax on the development of a mobile home lot to 80 percent of the average residential construction tax paid for a residential unit. The current law allowed for different interpretations, which were used to impose against mobile homes. The bill was prospective only, and it imposed tax based on the same average of a stick-built home. Another bill, S.B. 323, which the committee had not yet heard, allowed Housing and Urban Development approved homes to be placed into all residential areas with certain criteria and conditions. S.B. 408 would also affect those homes.

Karen Mullin, director, Washoe County Parks Department, testified in support of S.B. 408. Ms. Mullin told the committee S.B. 408 had been brought forward as a result of the Sun Valley Citizens Advisory Board. There were over 15,000 residents in that area, most of them living in mobile homes. Since the 25 years the tax had been in existence, approximately $300,000 had been collected in that area. Washoe County collected $80 per lot. That did not allow the Parks Department to build standard neighborhood parks in areas that had large numbers of mobile homes.

Ms. Mullin said when she was researching the issue, she found there was inconsistency in the method of taxation. Working with the district attorney’s office and with directors throughout the state, she looked for clarity and conformance, and a way to keep everyone whole, which was what S.B. 408 accomplished.

Chairman Goldwater asked for further testimony, and hearing none, closed the hearing on S.B. 408. The meeting was adjourned at 3:50 p.m.

RESPECTFULLY SUBMITTED:

Lois McDonald,

Transcription Secretary

RESPECTFULLY SUBMITTED:

Nykki Kinsley,

Committee Secretary

APPROVED BY:

Assemblyman David Goldwater, Chairman

DATE: