The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 2:10 p.m., on Thursday, March 11, 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 Dean A. Rhoads, Vice Chairman

Senator Randolph J. Townsend

Senator Ann O’Connell

Senator Joseph M. Neal Jr.

Senator Bob Coffin

Senator Michael Schneider

STAFF MEMBERS PRESENT:

Alice Nevin, Committee Secretary

Senator Joseph (Joe) M. Neal Jr., Clark County Senatorial District No. 4, testified the issue was the exemption of works of fine art for public display. He stated Nevada had approximately $667 million in tax exemptions or 30 percent of the General Fund revenue. He noted this exemption benefited one particular individual and this bill would repeal the exemption. He called attention to a memo written by Paul T. Mouritsen, Principal Research Analyst, Research Division, Legislative Counsel Bureau, entitled Tax Exemption for Art (Exhibit C). In reply to Senator Neal’s inquiry, Mr. Mouritsen estimated the revenue loss for Fiscal Year 1998-1999 in Paradise Township, where the Bellagio Resort and the Mirage Hotel and Casino are located. Senator Neal commented in an era of tight budgets, it seemed wrong to leave this exemption in law.

Senator Neal presented a chart entitled Tax Exemption for Art, Sales and Use Tax Losses and Property Tax Revenue Losses by Entity (Exhibit D). He commented he felt that it was not the intent of the committee or the Legislature to allow a viewing charge as a part of the exemption. He noted the Nevada Tax Commission agreed if there was a charge to view the fine art, an exemption could not be granted. He said this issue is now pending in court. In closing, Senator Neal said he felt the State of Nevada would benefit from S.B. 90 and he asked the committee to vote to pass the bill.

Andrew L. Barbano, Lobbyist, Casinos Out of Politics, testified for S.B. 90 and submitted for the record Testimony of Andrew Barbano before the Nevada State Senate Committee on Taxation regarding S.B. 90 (Exhibit E).

Viola R. Garrison-Cota, Lobbyist, Fremantle Society, testified for S.B. 90, saying people need to be able to see fine art without charge. David Q. Beamis, Ph.D., Lobbyist, Fremantle Society, spoke for S.B. 90, commenting the exemption was contradictory and not in the best interest of the state’s citizens. Dr. Beamis said he was against giving an exemption while at the same time allowing the property to charge a fee to view the art. Lucille Lusk, Lobbyist, Nevada Concerned Citizens, noted private citizens were angry and unhappy by the passage of the tax exemption in the 1997 Legislative Session. She testified it would serve the state well to repeal this special tax exemption by passing S.B. 90.

Michael D. Hillerby, Arts and Culture Manager, Reno Arts Commission, said the original intent of Assembly Bill (A.B.) 536 of the Sixty-ninth Session was to try to get more art into public view.

Mr. Hillerby noted there had been only one person to seek an exemption, to date, and suggested the committee look at whether the bill had met its purpose. He asked the committee for an opportunity to modify the existing law into something that was workable and would benefit Nevada’s citizens.

Ivan R. Ashleman III, Lobbyist, Concerned Citizen, testified it was a good idea to encourage marketing the arts in Nevada. He said culture and art had been slow to develop in Nevada but currently casinos were looking for new ways of promoting Nevada. He said people take residency in this state because of Nevada’s general tax policies. He noted fine art could be a huge business here, if Nevada were to become a place where the trading of art collections could take place. He noted as chairman of the Nevada Cultural Commission, this was an important public policy question. He stressed he wanted to encourage what was good for Nevada’s casinos, other businesses and especially the citizens of Nevada.

Senator Neal asked if the Rio Suite Hotel and Casino had brought in the Russian collection as a result of the passage of the original bill. Mr. Ashleman said he did not believe so because the collection was exempt since it was owned by a foreign nation.

Harvey Whittemore, Lobbyist, Mirage Resorts, said S.B. 90 was bad for the arts and bad for Nevada. He testified just 2 years ago a reasoned and rational approach to creating incentives to help remake Nevada’s image as a cultural wasteland was adopted in the last days of the 1997 Legislative Session. Mr. Whittemore agreed legislative action regarding A.B. 536 of the Sixty-ninth Session would seem to be warranted because of controversies regarding the bill. He said it was advisable to process some clarifying and ratifying language with respect to this issue. He acknowledged the Senate Committee on Taxation had authorized a draft of proposed amendments to this issue and he expected it would be ready in 2 or 3 weeks.

Mr. Whittemore said A.B. 536 of the Sixty-ninth Session was designed to bring fine art to Nevada to influence and inspire our citizens. He noted there are many different types of mediums which make up the arts. He pointed out individuals seeing fine art works, such as are found in the Bellagio Resort or the Mandalay Bay Resort and Casino, will see extraordinary visual experiences. He referred to the beautiful glass display, by a renowned artist, that explodes above the registration desk at the Bellagio Resort. He stressed the importance of artists being impacted and influenced by other artists and their ability to influence the next generation of individuals who view the visual arts in this state.

Mr. Whittemore said tax impacts and incentives, personal property tax, and sales and use tax need to be discussed. He pointed out that S.B. 90 would repeal an incentive which has been taken advantage of in this state. He stated legislation should not be written which entices and protects an exemption which has some advantage to this state.

Mr. Whittemore said S.B. 88, heard earlier this week, would raise gaming taxes and generate additional revenue for the state.

Mr. Whittemore explained S.B. 88 will generate additional revenue but the impact of that imposition would have a substantial effect on reinvestment in this state. He said for example, $10 billion in investment would create $8 or $9 billion worth of revenue, with over 50 percent as gaming revenue. He noted of the 50 percent of revenue, the effective tax rate is close to 8 percent. He pointed out if an economic disincentive is created, the loss of revenue would result in a $3 to $5 million loss from those entities which would have paid the extra $110 million. Mr. Whittemore emphasized money generated as a result of people seeing, participating in, visiting and coming into facilities with this type investment will be greater than the tax loss. He said a tax would never have been paid on a $300 million fine art investment in the State of Nevada because no art was declared with a tax being paid. He stated the art to which Senator Neal objected, would not have been sought and determined to be an investment in the nature that was presented in the 1997 Legislative Session.

Senator Coffin asked if the lawsuit pending was based on the purchase of art with the reliance of the passage of A.B. 536 of the Sixty-ninth Session. Mr. Whittemore answered reading the prior bill made it clear that the property was exempt from personal property taxation. He said the question was how to determine who met the exemption when one requirement imposed, as a result of a regulatory interpretation, required no admission be charged and yet admission was charged. He stated there were issues which need to be addressed in light of the state of the law and the pending lawsuits. He noted the meeting of the joint tax committees where the Nevada Tax Commission said a determination needed to be made on inventory and other issues.

Senator Coffin said he understood the art in question was purchased before the law was passed. Mr. Whittemore said yes, but the legislative intent was clear in the history of the law. He called attention to Assemblyman Mortenson’s (Assemblyman Harry Mortenson, Clark County Assembly District No. 42) question in the 1997 Legislative Session, if art purchased prior to the effective date of the act, such as beautiful art in boardrooms, could be grandfathered in. He noted the answer was affirmative. Mr. Whittemore said he thought it was clear that the issue of whether the legislation was designed to cover the art which was previously purchased or not, was answered by the affirmative answer. He commented to be fair, art when displayed appropriately, needs to be displayed for a period of time to qualify for the exemption.

Senator Neal clarified in order to take advantage of the inventory tax on the art, the person would have to be a dealer. He asked when the person with the exemption received a license to sell the art. Mr. Whittemore said he was exempt from getting a license because he was a secondhand dealer. Senator Neal asked when the license was received and Mr. Whittemore said he would get that information and report back. Mr. Whittemore clarified art items could be brought in and would be nontaxable as long as they were put in inventory for the relevant tax period. He said that was not the state of the law in November of 1998 and his client was exempt for a variety of reasons. Senator Neal said the 1997 bill stated in order to take advantage of the exemption, the fine art must be on public display. Mr. Whittemore said the Nevada Revised Statutes (NRS) 361.068 said fine art for public display was exempt from taxation. He clarified this meant works of fine art for public display in a private or public art gallery for at least 20 hours per week during at least 35 weeks of the full calendar year after the date on which it was purchased. He noted the question was how to qualify for public display if public display did not include the portion of the time when a fee was charged. He stated the Legislature establishes rules and administrative agencies implement them. He pointed out authority is given to adopt regulations, but things that are silent in bills cannot be imposed. He repeated the art in question was exempt for a variety of reasons. He felt the state was not losing money, it was gaining 2 percent by declaring the value of the art. He said the art would be subject to payment of the sales and use tax, which would generate money as a result of the revenues generated over the display. He concluded this bill would create incentives to allow people to display public art and if it were done appropriately and consistently with the tax policy, the state would be better off for it.

Senator Neal stated the Nevada Tax Commission had offered Mr. Whittemore’s client the chance to go forward as long as the art exhibit was free for the period of time stated in the law. Senator Neal asked if Mr. Whittemore knew his client refused to accept that arrangement. Mr. Whittemore said no.

Mr. Whittemore said the issue is sales- and use-tax exemptions, personal property exemptions, and the types of exemptions contained in S.B. 90 that would be repealed. He said he believed that without these economic incentives, the state would be worse off fiscally. He said the state tax policy encouraged certain types of investments to be made in this state. He stressed the state is rewarded amply because it gets gaming revenue dollars from the people who visit gaming institutions. He stated everything that the gaming industry does creates additional tax revenue.

Senator Neal cited an example of a seller who buys $300 million worth of art, builds a gallery, hangs 12 pictures, charges $10 admission but no children are allowed. He asked Mr. Whittemore if he thought the state as a whole would benefit from this. He said T. S. Eliot once wrote an essay in which he said hell was a place where nothing connects. He concluded these statements are not logical, nothing connects and the people do not believe it.

Chairman McGinness said the Senate Committee on Taxation had asked for a bill draft request (BDR) to deal with the issues that were brought forward by the Nevada Tax Commission, such as the issue of admission and other issues. He said there would not be any action taken today. He noted the BDR would be heard and Senator Neal could discuss those issues when both S.B. 90 and the prospective bill are heard.

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association, said the association was generally opposed to exemptions. She noted one of the problems was art avoiding taxation because it was not put on display. She said the association had taken the position that personal property tax is an honor system tax. She stated unless you are a very large payer of personal property, the probability of being audited is almost nonexistent. Ms. Vilardo commented the board had consistently supported exemptions dealing with personal property. She noted if the bill the committee requested filled some of the problems relative to sales tax, a request would be made to keep the personal property exemption.

Chester Richardson, Reverend, Urban Policy Institute, testified for S.B. 90. He expressed the opinion that the law is clear and he felt it was unfortunate that Mirage Resorts Inc., chose to ignore the provisions and intent of the law by charging admission during the period of time the art was on public display. He said bringing in fine art to Nevada to encourage corporations to increase the revenue and taxation is a fallacy. He stated the fine art displayed at this particular casino was brought in to entice patrons to come into the casino to gamble. He stressed S.B. 90 would repeal a law that is being misused.

Senator Rhoads requested the Department of Taxation provide a breakdown on the tax collected on art prior to 1997.

Chairman McGinness closed the hearing on S.B. 90 and opened the hearing on S.B. 244.

C.O. Watson, Lobbyist, Nevada Association of Tobacco and Candy Wholesalers, read memos, dated February 25, 1999 and March 9, 1999, into the record regarding S.B. 244 (Exhibit F).

Amy Halley Hill, Lobbyist, Retail Association of Nevada, noted the Phillip Morris Management Corporation was a client and she would speak on the first section of the bill. She spoke in support of section 1 of the bill, which had to do with gray market cigarette sales. She stated there had been a problem with cigarettes manufactured in this country, to be used outside of the country, brought back into this country and then sold. She said the manufacturers, retail association and wholesalers met to try to combat this issue. She suggested the legislation be amended to be effective on passage and approval. Senator Neal asked about evidence of the problem and Ms. Hill said Nevada and several other states have had the problem of cigarettes, for export only, being sold in the United States.

Ms. Hill testified against page 2, section 4 of the bill saying the Retail Association of Nevada did not see any reason for this section. She said it appeared wholesalers were looking at the state to try to involve them in contractual and credit relationships between the retailers and wholesalers.

Markos Mendoza, Concerned Citizen, testified against S.B. 244 because it would close his business. Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association, and Cigar Association of America Inc., said he had no comment on section 1 but felt section 4 of the bill was not necessary. John E. Jeffrey, Lobbyist, Brown & Williamson Tobacco Company, and Lorillard Tobacco Company, testified in support of section 1 of the bill and had no position on section 4 of the bill.

Stephen C. Moran, Lobbyist, Reno-Sparks Indian Colony, said when a person buys a carton of brand-name cigarettes, they expect to get that product. He noted a diverted product has different blends and the customer gets a different product. He said, in addition, the recent tobacco settlement is to be funded through the sale of cartons of cigarettes. He noted the diverted products do not pay a fee and the attorney general’s share of funds will decrease, which could be a significant amount of money.

Dino DiCianno, Deputy Executive Director, Department of Taxation, said the department had no opinion on this bill, but federal law would be established with section 1 of the bill. He noted the department had spoken with the Legal Division, Legislative Counsel Bureau, regarding two small changes in the language of the bill.

Chairman McGinness closed the hearing on S.B. 244 and adjourned the meeting at 4:00 p.m.

RESPECTFULLY SUBMITTED:

Alice Nevin,

Committee Secretary

APPROVED BY:

Senator Mike McGinness, Chairman

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