The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 1:40 p.m., on Thursday, March 4, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Senator Mike McGinness, Chairman

Senator Randolph J. Townsend

Senator Ann O’Connell

Senator Bob Coffin

COMMITTEE MEMBERS ABSENT:

Senator Dean A. Rhoads, Vice Chairman (Excused)

Senator Joseph M. Neal, Jr. (Excused)

Senator Michael Schneider

STAFF MEMBERS PRESENT:

Alice Nevin, Committee Secretary

OTHERS PRESENT:

SENATOR TOWNSEND SECONDED THE MOTION.

THE MOTION CARRIED. (SENATORS RHOADS, NEAL AND SCHNEIDER WERE ABSENT FOR THE VOTE.)

Paul Bancroft, Attorney, testified in favor of S.B. 262. He stated he was an attorney practicing primarily in state and local taxation. He acknowledged he was appearing today on behalf of Centex Construction Company, its subsidiary Nevada Cement Company and Kassbohrer of North America Inc. Mr. Bancroft explained this bill clarifies the sales- and use-tax treatment of property purchased or leased outside Nevada for use in interstate commerce. He explained clarity is necessary for both the department and the industry. He said under the Nevada sales- and use-tax law, the acquisition of tangible personal property outside Nevada will only be subject to use tax in Nevada if, at the time of the acquisition, the purchaser intends to use the property in Nevada. Mr. Bancroft said for example if a company, which has multiple locations throughout the United States, purchased a desk from an office supply store in Denver for use in its Reno office, the company would accrue and pay use tax to Nevada on the cost of the desk.

Mr. Bancroft continued if the property was not purchased for use in Reno, a use tax could not be imposed on the company’s subsequent use of the property in Nevada at a later date. He noted this is not an exemption, but recognition that in Nevada property is not taxed if purchased outside Nevada, for use outside Nevada. He emphasized the application of this rule requires an examination of the factual circumstances of the out-of-state purchase. He said this analysis could be difficult to apply to the out-of-state purchase of mobile transportation property such as aircraft, motor coaches, freight trucks and rail cars. In situations involving this type of property, the purchaser is often acquiring it with the intent of using it in a multistate system. He noted the various industries are similar. He said whether it is a regional airline or a company providing motor coach tours, they operate their mobile property in an interstate route system. He pointed out in both situations, when the business acquires or leases mobile property, it does so with the intent to use it in its route system among the various states, including Nevada.

Mr. Bancroft said it had been his experience, and that of companies with mobile property, that the Nevada Department of Taxation had only asserted a use tax on mobile property acquired outside of Nevada when the property was put to first functional use in Nevada. The department had not taxed mobile property acquired outside Nevada when the property was put to first functional use in interstate commerce outside Nevada and continued to be used primarily in interstate commerce after its entry into Nevada.

Mr. Bancroft gave three examples to illustrate the department’s application of the use tax in Nevada. He said the first example involved airplanes. In 1998, an airline operating aircraft in domestic and international routes became concerned that their use of aircraft on regularly scheduled flights to and from Nevada would subject those aircraft to a use tax in Nevada. The Department of Taxation concluded that the airline’s operation of aircraft in interstate commerce, which included regularly scheduled flights to and from Nevada, would not result in imposition of a use tax on the aircraft.

Mr. Bancroft said the second example involved tour buses. In 1990 and 1991, a manufacturer of tour buses made sales outside Nevada to companies which operated the tour buses on multistage routes which included trips to and from Nevada. In a subsequent audit, the department dismissed the deficiency determined to be due on those coaches once it was established that the buses were delivered outside Nevada and that their initial entry into this state was a continuation of a tour that commenced in California.

Mr. Bancroft noted the third example involved rail cars. A manufacturer with a plant in Nevada shipped its product to distribution centers outside Nevada by rail car. The manufacturer had been paying use tax to Nevada on its lease of the rail cars. In 1995, the manufacturer brought this to the department’s attention and the department informed the manufacturer that the rail cars were not subject to use tax and issued a refund of the tax which had been paid.

Mr. Bancroft emphasized these examples show the use tax has not been imposed when three criteria are satisfied. First, the property is purchased or leased outside Nevada. Second, the property is initially used in interstate commerce outside Nevada. Third, once the property enters Nevada it continues to be used primarily in interstate commerce. Mr. Bancroft said he had spoken with numerous companies that use aircraft, freight trucks or rail cars, and they confirmed his understanding of the department’s treatment of mobile property.

Mr. Bancroft commented S.B. 262 is consistent with the existing law and creates a presumption that the purchase or lease of mobile property, which satisfies the three criteria, will not be subject to Nevada sales and use tax. He noted this goes along with the historic practice of the department and provides predictability in the use-tax treatment of property for use in interstate commerce. He said meetings have been held with the department to discuss the language used in S.B. 262. He acknowledged the industry is encouraged by the department’s willingness to discuss the language and develop a bill which establishes clear standards for application of Nevada’s use tax. Mr. Bancroft said a clear standard is a benefit to both the department and the taxpayers. In closing, Mr. Bancroft said he hopes the department will provide an opportunity to hold further discussions to clarify the language so that both sides are in favor of the bill.

Stephen Horsford, Lobbyist, America West Airlines Inc., stated he supported S.B. 262. He urged the committee to support working with the department on any language amendments.

Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, presented State Sales Tax Treatment of Rolling Stock Purchased by Interstate for Hire Motor Carriers (Exhibit C). He said Exhibit C calls attention to an issue in Nevada which discourages people from buying rolling stock such as trailers and tractors for use in Nevada in interstate commerce or otherwise. Exhibit C shows the states (in red) that exempt truck and trailer purchases from sales tax. Mr. Capurro noted it was easier and cheaper to buy equipment elsewhere and put it into service elsewhere before bringing it into Nevada. He commented that is not friendly to Nevada businesses. Mr. Capurro said S.B. 262 will not change the situation but provides a level of comfort with respect to exactly what the policy is in Nevada. Mr. Capurro said at some point he would like to revisit the tax policy regarding rolling stock.

Terry K. Graves, Lobbyist, Pioneer Chlor Alkali, testified in support S.B. 262. He said Mr. Bancroft and Mr. Capurro have stated the case very well.

Ray E. Bacon, Lobbyist, Nevada Manufacturers Association, said a quick survey of his members indicated 50 to 75 companies would be affected by this issue. He concluded it is important to pass this bill.

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association (NTA), said the association supports the concept S.B. 262. She stressed in the future there will be more bills of this type because of the problem of interpretation of the sales and use tax.

Senator O’Connell said the Associated General Contractors (AGC) were looking at a bill having to do with extremely large earth moving equipment. She asked if that bill been introduced yet. Ms. Vilardo said not to her knowledge. Senator O’Connell asked Ms. Vilardo if she knew how many states acknowledge large equipment that is not used out of state. Ms. Vilardo said she had recently received a book which had information on exemptions and she would make it available next week.

Ms. Vilardo noted this is an issue of clarification of a statute that does not lend itself easily to changes and interpretations on how business is done. She said accommodating the way business is done today was not envisioned when the sales- and use-tax statutes were put into place. She summarized today there are a lot of interpretations of tax issues, particularly from the Department of Taxation, and definitions need to be put in place.

Larry Bennett, Lobbyist, Union Pacific Railroad, spoke in favor of S.B. 262.

Mary F. Lau, Lobbyist, Retail Association of Nevada (RAN), said most of the major retail firms are based outside of the state and would not enter into this picture, but there are Nevada-owned local firms that also own businesses in other states. She stressed RAN sincerely supports this bill and would like an opportunity to testify to make sure the language is clear.

Stephen S. Smith, Vice President of Finance, Frontier Tours, a charter motor coach company based in Carson City, said his company operates throughout 42 states and for many years had followed the principles of this bill. He explained 5 years ago it took about one-third of the annual income, in attorney’s fees, to make sure the company would be able to continue to use these same principles. He noted he was concerned because the ruling contained some language that said the Department of Taxation could change its mind. He stressed he strongly urged the committee to adopt this legislation because it will make life much more certain for the business community.

David Pursell, Executive Director, Department of Taxation, said he supported this effort to clarify, for business and the Department of Taxation, an issue that has been a concern over the years. He said he appreciated the fact that all parties were willing to discuss the language in this bill. He noted in the short time he has served as Executive Director, it appeared the department had used as guides the 1962 Attorney General’s Opinion having to do with Bonanza Airlines and the 1985 Nevada Supreme Court case with Great American Airways. He said that was the foundation the Department of Taxation used to make the determinations in these kinds of cases. He acknowledged Mr. Bancroft had assured him the intent of this legislation was to support those two opinions. He stated he would appreciate having an opportunity to look at the wording to make sure exactly what is said in the proposed legislation.

Chairman McGinness asked Mr. Bennett to be the lead person and to inform him when to schedule a work session on this bill.

Chairman McGinness adjourned the meeting at 2:20 p.m.

RESPECTFULLY SUBMITTED:

Alice Nevin,

Committee Secretary

APPROVED BY:

Senator Mike McGinness, Chairman

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