The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 1:40 p.m., on Thursday, March 25, 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

Senator Maurice E. Washington, Washoe County Senatorial District No. 2

STAFF MEMBERS PRESENT:

Mavis Scarff, Committee Secretary

James T. Endres, Lobbyist, AT&T, indicated S.B. 383 was a bill that the telecommunication industry had worked on together during this last year in an attempt to clarify some issues that arose during the business year with the Department of Taxation. Mr. Endres indicated there seemed to be some ambiguity with respect to when a company should be centrally or locally assessed. He stated that the companies reflected in S.B. 383, the wireless and cable industries, have all historically been locally assessed, and that the bill made it clear that certain industry segments, in the competitive market place, were taxed in the same way so that there was parity at the tax level. Mr. Endres concluded that in order for parity to continue through the taxing process, S.B. 383 tried to eliminate the ambiguity that existed at the state level and the Department of Taxation level, and expressed specifically which industry segments would be locally assessed, and which would not.

Helen A. Foley, Lobbyist, Alltel, indicated Alltel was formerly Centel Cellular, then Sprint Cellular, then 360 Communications, and now Alltel. She stated they were the largest providers of cellular service in southern Nevada, adding that when they first began in the early 1980s, a letter was received from the Department of Taxation clearly outlining that their property would be taxed by the local assessor. Ms. Foley said the majority of utilities were taxed by the Department of Taxation and that because there was so much competition there was no monopoly whatsoever. She noted they refer to it now as wireless rather than cellular because of the new Sprint PCS Company and the Nevada Bell Mobile Services. She emphasized this bill guarantees that they will stay taxed at the local level. She pointed out that intangibles, such as the good will of the name of a company, was one of the issues that one heard about occasionally. She stated companies should be taxed for the property they own, but using the same type of rate, or the same considerations, as any other property, and should not include intangibles. She declared that intangibles should not receive any value, especially with a company or industry that was as competitive as the wireless industry. Ms. Foley stated the major part of the bill was on page 3, line 17, subsection 7, and noted that the bill specifically excluded commercial mobile radio service, which was the technical word for wireless, radio or television transmission services, or cable television services. She concluded saying there was no fiscal impact on this bill, because none of these companies were currently taxed at the state level, they were all locally assessed.

Ron Reynolds, Director, Property Taxes, Nevada Bell Wireless, noted that his comments would be brief as the previous two speakers had concisely presented exactly what was taking place in the bill. He pointed out that the key item was that there was no fiscal impact as a result of the amendment. However, he indicated they would be remiss if they did not tell the committee about one particular situation that existed in the state that could result in a change of classification. Mr. Reynolds reiterated that there was no fiscal impact of the bill and, with the proposed amendment, there was no movement from existing companies that were locally assessed to central assessed, or from central to local. He noted the one anomaly was Central Telephone Company, known as Sprint, which is wholly located within Clark County, and that company would be moved from central assessment to local assessment. He wanted to make sure that everyone understood this point of clarification. He stated that Central Telephone Company was the only company this bill would impact in that manner.

Senator O’Connell declared, for the record, that they have property in Pahrump or Nye County, and there was a transmitter located on the property.

Robert Gastonguay, Lobbyist, Nevada State Cable Telecommunications Association, stated they had always been locally assessed. He said he thought Congress recognized this fact in that it gave jurisdictions to the local governing entity and themselves and, therefore, the associations supported this bill.

Regarding the testimony stating there is no fiscal impact in this bill, Senator Neal asked if there was a fiscal impact to the companies that were represented. Mr. Endres responded that there would be no impact, whatsoever. He said the bill just clarified and eliminated the possibility of ambiguity of how to interpret the classification of certain industries as to whether they were centrally assessed, or locally assessed. He reiterated there was no impact on the state. Senator Neal remarked that he did not ask that question. He said his question was, if there was an impact to the company that was represented here, not necessarily the state? Mr. Endres replied there should be no fiscal impact on the companies. Senator Neal then asked why the bill was needed. Mr. Endres indicated that earlier in the year some of the industries members, wireless particularly, were notified by the Department of Taxation that it had now made an interpretation of their industry relative to the definitions that were contained in law on how to define when a company was centrally or locally assessed. He said the definition, as best he understands it, went to the issue of the fact that their signals have the capability of crossing intercounty and interstate lines. Mr. Endres stated it was their belief that the legislative history really does not define a wireless company as a company that should be centrally assessed; because what really defines a company to be centrally assessed was whether or not it had physical property that crossed county lines, not a radio signal. He continued saying that they came to this legislative session to make clear that there were certain industry segments, as a result of changes in technology, that for purposes of clarity, this bill should make clear that they were locally assessed today; that they preferred to be locally assessed for business purposes as that was how their competitors were assessed; and that was the driving force behind this bill.

Senator Neal continued reading the language on the first page of the bill, "‘Property of an interstate or intercounty nature means tangible property that:’ and it goes on through line 9 and says ‘must be assessed as provided in subsection 7 of NRS 361.320.’" Senator Neal read from Nevada Revised Statutes (NRS) 361.320 subsection 7. He said, as he understood, the Nevada Tax Commission would not be able to tax this as a centrally assessed property. Mr. Endres said that was correct. Senator Neal then asked where were they being eliminated? Mr. Endres replied that they were being eliminated on page 3, lines 17-23, subsection 7 of the bill. Senator Neal confirmed that they were actually amending that language. Mr. Endres concurred.

Margaret A. McMillan, Lobbyist, Sprint, said she wanted to address the issue regarding Sprint, Central Telephone. She indicated that they were the only telecommunications located within one county. She noted that though none of their property crossed county lines, they had been centrally assessed. She continued saying this bill clarified the definition that if a company was located wholly within one county, they were no longer subject to central assessment. Senator Rhodes asked if their tax assessment would remain the same. Ms. McMillan replied that she had been told that there would be some slight fiscal impact, but only on Clark County. She said their attorney had discussed it with Clark County and had understood that it was not a problem. Senator Rhoads asked if slight in Clark County equaled a million dollars? Ms. McMillan said she did not think so, that it justs corrected an inequity that had existed for many years.

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association, indicated their support for the bill. She stated with the exception of the Sprint company, that was the way the companies had been taxed. She indicated that they were just clarifying in statute, and making sure that they were specifically getting that identified statutory authority to have continued what had been the practice in the past. Ms. Vilardo noted that though there have been no problems with it, the clarification was needed, because the issues became more complex as people tried to figure out ways to get more money. She urged support of this question, stating it was a stand-alone question. Ms. Vilardo indicated that how the committee chose to answer the policy on the intangibles taxation was another issue that impacts this whole sphere, since they were now in a deregulated environment. She said this bill had nothing to do with that problem as it just says they continue to do what they have been doing. She agreed that Clark County should be locally assessed and should not have been centrally assessed, and again urged passage of the bill.

Mary C. Walker, Lobbyist, Carson City, Lyon, and Douglas counties, stated that they had been working with the Department of Taxation and with Senator O’Connell’s S.B. 253 of the Sixty-ninth Session committee for the last couple of years, and there were a couple of things of which she was unsure and had questions.

Ms. Walker said it was true that cable television and mobile radio services that were being assessed based on the local assessement, which was based on the replacement of property, less depreciation. Centel Sprint had been centrally assessed, which meant that assessment was based on the business value of the property, including intangibles. She said there was a fiscal effect regarding Sprint to which Ms. McMillan alluded. Ms. Walker indicated there would be a decline in the assessed value for that company so they would have less of a tax burden. She said this meant there were less revenues going into Clark County and school districts in southern Nevada. She felt that it was important to take a look at a fiscal note to see what effect there was for Clark County. Secondly, she said, over the last few years there had been a series of discussions regarding this whole issue, and she noted that the utilities had current assessment practices that were unequal. Ms. Walker stated that some companies, cable and cellular companies, were currently being assessed based as locally assessed, and everybody else was based as centrally assessed, which was a higher tax burden. She indicated the companies had argued that they needed to equalize so that everybody paid the same type of taxes since they were assessed the same, and then they would have equal taxation. She noted her concern was the determination by the State Board of Equalization that if they had "slipped through the cracks" in regards to some of these entities, then "two wrongs don’t [do not] make a right" was exactly the phrase they used at the State Board of Equalization. She said that they should be taxed on a centrally assessed basis to get everybody to an even level. But regardless of that, she said, if the committee was going to correct the core problem, they should make sure that these companies were taxed at an equal level. She noted the utilities have been presenting this for a couple of years, and stated the problem was that this bill would make some of those companies locally assessed, and put into law that they were assessed. She again stressed that was replacement value less depreciation, but noted in another bill, Senate Bill (S.B.) 411, that the utilities were presenting, they were asking for the assessment to be based on book value and cost which was different than locally assessed.

Ms. Walker stated there were two different values here. She suggested the committee look at S.B. 383, along with S.B. 411, to make sure everybody was being assessed equally at the same level. Ms. Walker stated that passing this law and potentially passing S.B. 411 would solve the problem, as there would be two different assessment practices for competitors. Senator Neal asked if she knew whether or not these companies that would be excluded by this particular measure would take the same intangibles and deduct that from their federal income taxes. She said she was not sure. Senator McGinness asked if she felt that this bill, regardless of S.B. 411, would have no effect on Carson City, Douglas and Lyon counties? Ms. Walker said no it would not, because the cable and cellular were done on a local assessment. She noted that this problem kept coming up at the Nevada Tax Commission, the State Board of Equalization, Department of Taxation, and at the S.B. 253 of the Sixty-ninth Session committee. She concluded stating that every time an unequal assessment was brought up it affected everybody in the entire state, and she just thought the two bills should be reviewed together.

Senator McGinness asked if there was anyone who could answer Senator Neal’s question. Mr. Reynolds indicated he was not a specialist in income taxes but said if Senator Neal would restate his question, he would attempt to give a response or tell him that he does not know. Senator Neal said the question was, could the taxable values, that were listed in the bill that they were trying to exempt themselves from, still be written off their federal income tax. Mr. Reynolds replied they were not trying to exempt themselves from any tax. He said they were attempting to maintain the status quo so the property tax liability that these companies were incurring, and have incurred for the last 12 to 15 years, will stay exactly the same, both now and into the future. He said if there was the ability to write off an intangible value, then that would stay exactly the same. He concluded they do have the ability, on the income tax side, to account for the property taxes that they paid, as those were recognized as an expense, just as they were on a personal residence. He said there is nothing to be gained or lost by maintaining the status quo.

Samuel P. McMullen, Lobbyist, AT&T, indicated his support for the measure.

Chairman McGinness closed the hearing on S.B. 383 and opened the hearing on Senate Bill (S.B.) 403.

Senator Maurice E. Washington, Washoe County Senatorial District No. 2, stated he understood there were inherent problems with the bill, and he was open to ideas and discussion of those problems in order to find a resolution. He indicated certain businesses had contacted him in regard to helping out those individuals that fall below the 150 percent federal poverty level. He said he had received a breakdown of those amounts from a single-parent household to an eight-member household. Summarizing the current bill, he said it exempted businesses that hire those people if they provide child care either on-site or with a voucher program, and anybody that hired a person that is 150 percent below the federal poverty level would receive the tax exemption. He stated the problem they had found was that a number of businesses would hire these individuals, but they did not provide either a voucher or an on-site facility for child care, and they felt they were being excluded from the exemption.

Senator Washington pointed out this bill was an attempt to provide the exemption for hiring these recipients. He said there was also a concern by those businesses that already provided a voucher or had an on-site facility for child care, that they would lose their exemption because this language was stricken. He repeated that he was proposing that if they could find a mechanism, narrow in scope, to include those businesses that were willing to hire individuals that were 150 percent below the federal poverty level, but do not provide child care or a voucher, so that they could take advantage of this tax exemption, he would be happy to include this language back in the bill.

Chairman McGinness said he believed it was Senator Augustine last session that brought this forward and if a business hired qualified people and provided child care, they would get the exemption. Senator Washington concurred.

Senator McGinness confirmed that Senator Washington was testifying that he would still want to give the exemption for those businesses who hired people below the poverty level, but who do not provide child care. Senator Washington confirmed saying that these were small businesses that had one or two employees and were willing to take the chance on these individuals, hire and train them, but they could not take advantage of the tax exemption because they could not afford to provide vouchers or on-site child care.

Senator O’Connell said if the committee decided to process the bill, the language had to be clarified. She stated her concern was to identify the household: if it was a one-person household, could that person hold down two jobs, and if they were holding down two jobs which business was going to get the credit; do you take both incomes if a man and wife were both working. She indicated that the language had to be identified by the household and the job specifically. Senator O’Connell noted that even if the committee put the language back in, Senator Washington would still have to do something with the bill, or the current statute, because it does not identify the number of persons in the household or what the cap is on the federal poverty level. She stated, for example, a one-person household was $12,075, an eight-person household was $41,475; but it does not make reference to the fact that this was the first job or the second job, or a combination of both jobs. She indicated there were some loopholes in the current statute, so if the committee was going to fix and amend it, they ought to amend it so it reflects the 150-percent federal poverty level with the number of households, including the vouchers or the on-site facilities, and with businesses that cannot offer either one.

Senator Neal said the language in this bill reads for the people or persons to qualify in a calendar quarter they must have 150 percent or less of the federal designated level signifying poverty. He asked the meaning of "or less" in that language. Senator Washington said that was anything that was below 150 percent, up to and below 150 percent, of the federal poverty level. Senator Neal asked what this meant in terms of the people who qualify or the employer who hired these particular individuals, if there was a "less than" 150 percent. Senator Washington replied that he thought the intent of the legislation, or this current statute, was to provide a mechanism for those that were doing on-the-job training, or for welfare recipients that were entering the work force; and if they met or fell below that 150-percent federal poverty level, then there would be an exemption. Senator Neal asked what that 150 percent means in terms of dollars? Senator Washington said it was not designated in this bill; if it was a one-person household, in dollars that was $12,075 a year; if it was an eight-person household, it was $41,475 per year. Senator Neal said so when we add "or less" to that, it meant less than the top figure so it could be zero dollars and up. Senator Washington confirmed that statement. Senator Washington then said he knew there would be some opposition to the bill, but he would be willing to work with interested parties to clean up the current statute, and work with those businesses that cannot provide a voucher or on-site facility to include this exemption for them.

Jan Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada, said when this bill first passed last session, they were skeptical that it would actually work, because it does not make sense that a business would hire someone at a minimal or low wage and then proceed to give them a child-care benefit. She noted there were many businesses that do provide child-care vouchers, but she does not think they came on board after this bill. But she stated her opposition to the bill emphasizing her association supports livable wages with benefits. She noted her concern was if you take out the child care from this portion it really became a reward to businesses paying low wages; this was business welfare, and the whole point of this bill was to give incentives to provide child care. She stressed if the committee decided that they did not want to do that, then they should delete the whole subsection, but not leave part of it and just give businesses a tax break because they hire low-wage workers. She told the committee child care had become very expensive in our state; i.e., a single mom with two children would pay a minimum of $600 a month, almost a third of their income, if they were making 150 percent of poverty, which was $20,000. She urged the committee to oppose the bill. Ms. Gilbert then read Testimony in opposition to SB 403, by Roberta Gang, Lobbyist, Nevada Womens Lobby (Exhibit C).

Lisa Appelrouth Guzman, Lobbyist, Nevada Empowered Womens Project, read from TESTIMONY IN OPPOSITION TO SB403 (Exhibit D).

Jon L. Sasser, Lobbyist, Washoe Legal Services, said if the intent of the bill was to provide tax incentives to hire people who were currently earning less than 150 percent of poverty, but once they were hired to allow them to earn more, and therefore, to move up in the world, then he thought it was a good idea; however, if it was to reward people for paying low wages it was a bad idea. He stated, assuming it was the former and the bill could be redrafted that way, he supported the idea, in general. He also agreed with the last two witnesses regarding the roll back of the credit for free child care, and to encourage private businesses to offer child care to their workers. He stated he would like to keep those incentives in, but, otherwise, if the goal was to hire low-income folks then giving the tax break was a good idea.

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association, spoke in opposition to the bill. She said it was another exemption, and it was a policy issue of eroding a tax base. She stated if the problem existed with child care then it should be provided for out of the General Fund of the state and made available to those persons who otherwise would have a problem. Having spoken to the sponsor of the bill, Ms. Vilardo said she believed the sponsor’s intent was good, and it was not to pay low wages, but was to try to get an incentive to provide jobs for people who otherwise might not be employed because of their skill level, and to make it worthwhile for business to employ these people and train them to a skill level that would let them get a better job. She declared that none of her members wanted this bill, and the board opposed the exemption on policy issue. She urged the committee to delete the language as deleted in the bill, to delete the child-care provision, and to write a letter to the budget division, or the money committees, stating there was a policy need to be addressed for families that were low income and having a problem providing child care. Ms. Vilardo commented that was something that should be done from the human resources’ budget, not through tax abatements.

Chairman McGinness noted Senator Washington said he would be willing to talk with interested parties who want to try to work on some language, and invited them to visit with him. Chairman McGinness closed the hearing on Senate Bill 403 and opened the hearing on Senate Bill (S.B.) 424.

Senator Michael A. Schneider, Clark County Senatorial District No. 8, indicated he had sponsored Senate Bill 424 to get the Department of Taxation to clarify the taxing of photographer’s proofs. He said it was his feeling that proofs should not be taxed, and were not taxed in current law. He cited a Clark County photographer who billed his commercial accounts in three stages: initial billing when he started the work, second billing after he had taken the photographs and delivered the proofs, and the final billing when he delivered the prints. The Department of Taxation said he was getting paid for proofs because of the way he bills, but, in fact, once the proofs were marked, they are thrown away. Senator Schneider then introduced Joanna Brooks noting she uses his services. Senator Schneider indicated his constituent, Tony Scodwell, was unable to appear today, and thanked the chairman for allowing Mr. Scodwell to testify next Tuesday.

Joanna L. Brooks, Lobbyist, Alltel, speaking for Tony Scodwell Photography on a pro bono basis, said his problem was that currently the Department of Taxation considers negatives the first rendering, and Mr. Scodwell maintains that he can not show negatives to a client, he must show proofs to a client, and that is a service. She explained that proofs were part of his service and currently he was being taxed on that service, and there should not be a tax on service, just on the sale of the tangible property. She continued saying the customers view the proofs, and then they order the appropriate pictures, and that was when the tax should be assessed. Chairman McGinness asked, for example, if there was a $100 charge to have some pictures taken, another $100 when the proofs were shown, and then if the customer ordered another $100 worth of pictures, he would pay for the pictures, but not for the first $200 payments. Ms. Brooks agreed.

David Pursell, Executive Director, Department of Taxation, stated that this was a decision by the Nevada Tax Commission based on the Nevada Administrative Code 372.330 and 372.340, and it was his understanding that in 1993 this regulation was debated at length, and that the Nevada Tax Commission had made their determination based on those regulations. He said, from the department’s perspective, they had taken the position that the Nevada Tax Commission denied the photographer’s requests simply because it did not fit within the regulations that were hammered out with that industry group. Chairman McGinness asked if it was in 1993? Mr. Pursell stated that it was.

Chairman McGinness closed the hearing on Senate Bill 424, noting, as Senator Schneider had indicated, Mr. Scodwell will be afforded the opportunity to testify on Tuesday, because he was not able to be here today. Chairman McGinness opened the hearing on Senate Bill (S.B.) 426.

Senator Michael A. Schneider, Clark County Senatorial District No. 8, explained that in some homeowner associations, the common areas, the pool, clubhouse, and greenbelt areas, were taxed separately. He stated it was his feeling that the value of a townhouse or condo reflected the value of those common elements. He stressed if the greenbelt, clubhouse, pools, tennis courts, all amenities, and even the gated entry, were removed the units would not be worth as much money. He said he felt that in some cases it was a matter of double taxation, for example; if one was paying tax on a $100,000 unit that without those amenities might only be worth $82,500. He stated he thought that was double taxation.

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association, indicated the association’s opposition to this bill, but stated they understood the makers wanting to have the bill and their intent. In essence, she said, the key was section 361 (NRS chapter 361) which dealt with property tax and everything that was deleted, including the obsolesce of real property and improvements to the property, and the elimination of the 1.5-percent cost of replacement. She said she explained to Senator Schneider that because it had an effective date of July 1, 1999, and assuming that the assessors could redo their computer programs to prepare a notice of value in December to accommodate this, that probably a person would find that the tax on their house had gone up 40 percent. She noted on page 3, the committee would find the provisions that speak to the obligation of the assessor to diligently find the names of those persons for whom the property was going to be valued, and ascertain through due diligence that valuation. She said she thought, by what had been deleted, that they had just said that business does not have to pay property tax. She stated that her suggestion for the bill was that this committee officially request the S.B. 253 of the Sixty-ninth Session committee to review the issue with the assessors and interested parties, and return next session with a recommendation, explaining what was a perception issue and not reality, identifying where the problem in reality existed, and what should be the correction.

Senator Schneider indicated he would agree with Ms. Vilardo’s recommendation if the bill could be looked at somewhere, so he could report that action back to the associations in Las Vegas. Chairman McGinness said he thought, if the committee agreed, that they could send a letter to Senator O’Connell and ask her to investigate. Senator O’Connell asked if Kevin Welsh, Deputy Fiscal Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, could obtain a copy of the Sun City Summerlin v. State, Department of Taxation, 113Nev(1997) court case from 1997. She noted, in that case, they challenged a very similar issue in court, and she thought it might be helpful to them if they had a copy of that case.

The committee requested a letter of intent (Exhibit E) be sent to the chairman of the S.B. 253 of the Sixty-ninth Session committee.

Chairman McGinness closed the hearing on Senate Bill 426 and opened the hearing on Senate Bill (S.B.) 522.

Harvey Wittemore, Lobbyist, Nevada Resort Association, said he wanted to make it very clear that this bill was not designed to impact, in any way whatsoever, the "Taxpayers’ Bill of Rights" (Senate Bill (S.B.) 362). He stated he wanted to make it very clear that he thought this was the "flip side of that coin" and with his testimony he hoped that point became clear.

Mr. Whittemore noted that several provisions of the sales- and use-tax code required that retailers display the sales- and use-tax amounts separately from the purchase price of an item, such as upon a cash register receipt, and provided criminal; i.e., misdemeanor penalties for failure to do so. He continued saying similar statutory provisions gave the Department of Taxation the authority to promulgate regulations to implement that directive in chapter 372 of NRS. However, he stated, the law does not allow the Department of Taxation or the Nevada Tax Commission to impose additional tax liability for noncompliance for those particular directives. He testified that as a result of that dichotomy, in several recent audits of businesses in the Las Vegas area, mainly the resort hotels which they represent, the Department of Taxation auditors had interpreted these statutory provisions as empowering the department to impose sales- and use-tax liability upon the full-face value of show tickets or wedding service packages, which had listed the face value as including sales- and use-tax, casino entertainment tax, and other elements not subject to sales- and use-tax, such as entertainment or server gratuities, thus imposing a tax on a tax. He said it was not allowed anywhere in Nevada statutes, and there was nothing that could be done about it statutorily by directing a modification of the law, because the law was passed by the people, and therefore, they attempted to craft the language in S.B. 522 as a directive to the Nevada Tax Commission and the Department of Taxation to ensure that they construed those statutes in such a way as to make sure that they did not have a tax on a tax.

Mr. Whittemore said clearly the issue in those cases was that the reports of the amount of the sales and use tax which was required was broken out indicating which items were exempt and which items were not. He cited a $500 MGM (MGM Grand Hotel/Casino) Wedding Package, where a bottle of champagne was included on which the tax had already been paid, but the auditors looked only at the $500 charge and taxed the casino on the full value. He reiterated that was not what the law said, that was not the intent and, in his discussions with the new director of the Department of Taxation, that was not his desire; therefore, if this Legislature decided to process this legislation, he thought the first thing that would happen would be that the Department of Taxation would initiate regulatory proceedings to adopt a regulation further flushing out these issues.

Mr. Whittemore said he felt it appropriate to make sure that there was a strict construction of these tax statutes, because he thought it was clear that this committee had said to the Department of Taxation, collect the taxes that the Legislature authorized, but do not turn their position into a revenue-generating department. He requested the Legislature issue this as a directive rather than modify particular statutes, because this was not in the law. He concluded saying that with these examples, it should have been clear that there should be no attempt to have a tax on a tax, but it needed to be made clear that this was the direction the Nevada Tax Commission and the Department of Taxation should take in these types of audit proceedings and direct their audit staff accordingly.

Senator O’Connell said this was the same issue, that they had already heard, which addressed the question about what defines a taxable sale. She stated, that with respect to this case, it was certainly not the Department of Taxation’s position that there should be a tax on a tax. She noted the question was how to differentiate a penalty associated with failing to do something, versus an audit process that said pay the tax, when the law does not say the penalty is to pay the tax. She said one could probably require payment of the penalty by regulation, but a tax could not be imposed if the audit was not done correctly. With respect to a complete wedding package, she asked how does one break out those components that comply with "a regulation" when 50 percent of those items already had taxes paid on them. She concluded saying it was one of those things that the committee needed to work through.

David Pursell, Director, Department of Taxation, admitted when he read this bill, he did not have any idea that this was the problem. He stated he certainly understood the argument, and he supported that the staff needed to understand what constituted a taxable sale. He assured the committee that he thought, through the Taxpayers’ Bill of Rights, the new deputy obtained from the attorney general’s office, and now that he understood some of the inconsistencies in the problems that the business communities had with the Department of Taxation, they could put into effect the steps needed to ensure that there was a consistency and compliance in the business community. He said when he first read this bill, he was hoping that they could handle it through the regulatory process, but he understood Mr. Whittemore’s concern that there were current cases right now. He declared that while he was director they were not going to tax a tax, but he thought what they had started to put into place, with the Taxpayers’ Bill of Rights and a few other things, they could address these issues. He said he was not aware of some of them, but learned about them through proposed legislation.

Mr. Whittemore responded although there was no intent to have a tax on a tax, there clearly were nontaxable items in these packages, which should not be subject to the tax. He stated he thought this type of legislative direction was appropriate, especially in light of the new director’s willingness to implement this through a regulatory process, and that they pledge their cooperation to work with Mr. Pursell and his department in coming up with something that got these things consistently handled so that they did not have the problems that they were currently having.

Senator Neal directed his comments to Mr. Pursell, stating this bill dealt with two chapters, one was sales tax and the other was local school-support tax, but they both dealt with sales and use taxes. He stated each chapter had within it exemptions that had been placed there by the Legislature. He said his question was why would this be so difficult to manage when the exemptions in statute said what should not be taxed. He said that he heard the argument about a tax on a tax, but it seemed to him that if it had not been exempted by the Legislature, then the Department of Taxation seemed to be right in their duty to impose. Mr. Pursell replied from his perspective it had to do with inconsistencies in the way the staff at the Department of Taxation had handled some of these issues, indicating they had not necessarily followed what was in statutes regarding exemptions, or in this case it looked like double taxation. In answer to Senator Neal’s question, he said as director of the Department of Taxation, he thought he could handle it in the way that he was going to handle the department.

Senator Neal asked him to give an example of double taxation so he could understand it and it could be on the record. Mr. Pursell replied in this case, as he understood it, a $100 coupon that was offered by a wedding chapel or a casino, could include a bottle of champagne, gratuities, and sales tax, all within that coupon, when there had already been a sales tax issued on the separate components of the coupon. Mr. Pursell said he did not know everything that was included in these coupons, but the Department of Taxation was taking the full value of that coupon, $100, and applying the tax to it again, to everything that was included in that coupon, even though it was separately identified. Senator Neal asked what was wrong with that? Mr. Whittemore replied the point was that the tax had already been paid on the taxable items. He said the $100 the customer paid included the sales tax on the champagne, and a $10 gratuity, which was nontaxable. Then he said when that $100 is all aggregated, the casino paid the sales tax on the full $100 which meant a double tax on the champagne, as well as imposing the tax on the gratuity which was exempt. He explained what the Department of Taxation was saying was they understood the problem, and all that Mr. Whittemore was saying was the directive needed to come from the Legislature to simply impose the tax that the Legislature had directed and only exempt those items which were exempt. He clarified if there was another item that had not been taxed, and was not otherwise exempt, then the audit would show that the tax would have to be paid on that item.

Mr. Whittemore gave another example of a show that was included in the wedding package. He said the show had a casino entertainment tax that was paid by the casino, but they do not pay a sales tax on top of the casino entertainment tax. He emphasized that the show was part of the package and should not be taxed twice. He said this directive was saying collect the tax on the items that were taxable, make sure they do not give an exemption where there was no exemption, and make sure that they get the right dollars.

Senator Neal asked when someone gets a coupon, or a piece of paper that can generate a gift from some store was it not true that the individual had made contact with those persons from which that coupon or gift could be reclaimed for items? Mr. Pursell replied he was not familiar with any coupons where a gift was involved, and indicated he would be glad to research that for Senator Neal.

Senator Neal, referring to the wedding chapel’s coupon for champagne, said he assumed the wedding chapel was not selling the champagne, so the recipient would have to go to a store to get it. Mr. Whittemore disagreed, saying the coupon showed the list of benefits one receives, one of which was a bottle of champagne that the wedding service would provide; it was not a coupon that allowed the recipient to go out and get it. He said these were self-contained packages. Senator Neal confirmed that it was a package given by an establishment, the wedding chapel. Mr. Whittemore said a wedding chapel within a resort, or a resort simply saying here was a package and with the package was both a show and included sales tax. He stated that if the auditors also applied a tax on the total cost of the package, that was double taxation. Senator Neal asked if, as a taxing department, they tax the inventory of the hotels, the wedding chapel that gets the gift, or what? Mr. Pursell said they audit whatever they have defined as the scope of the audit for that entity. He stated, in the case of the wedding chapel, they looked at what the auditors determine were taxable items, and they had included these packages as part of their audit scope. Senator Neal queried if they were doing the audit and this coupon says "taxes included," what do they do? Mr. Pursell replied currently they were taxing the full value of that coupon. Senator Neal confirmed that full value means $100 in this case. Mr. Pursell agreed saying a $100 coupon that included gratuities and taxes. Senator Neal inquired what means were used in terms of tracing to see whether or not the taxes were actually included. Mr. Pursell replied it was again through the scope that had been identified by their auditors, that it was part of the information that they ask for when they audit an entity, and the entity would have to supply that information for the auditor when they look at the business records. Chairman McGinness asked if the entity bought 1000 bottles of champagne, the auditors would ask to see where the entity paid the tax on the champagne. Mr. Pursell confirmed his statement.

Mr. Whittemore said these were the result of sales tax returns which show that the tax on the champagne had been paid as well as on the other taxable items, and that the only discrepancy was in the value of the package versus the fact that the tax had already been paid. He stated this was not an audit where someone had failed to pay the tax altogether, this was the type of audit where sales- and use-tax returns were disclosed, showing the total sales tax paid. He continued saying in those audits that require tax payment on the full value of the package, which included gratuities, items that were not taxable, and items for which the sales tax had already been paid, was a tax on a tax. Mr. Purcell stated that as Director of the Department of Taxation, he would feel more comfortable if the Nevada Tax Commission would review the whole situation through regulation and clarify it. Chairman McGinness asked him if he would prefer that rather than this bill? Mr. Pursell stated he understood the committee felt that the Department of Taxation needed that directive, but he assured the committee, that one way or another, there was going to be a regulatory review of this issue.

Senator Coffin stated he did not think there was anything hidden here, but that it was an open request for strict construction. However, he said what he really wanted to try to do was measure if there was a fiscal impact. He asked Mr. Pursell how many other things were being taxed as packages in some way or another. He said he suspected there were things out there that combined a combination of services which were not taxable, and goods which were taxable, and maybe a little of bit of both. He stated it does not mean that the committee should not process legislation like this, but he just wanted to know if it could cause a "burp" in the tax revenues. Mr. Pursell answered that he would have to research that and get that information for Senator Coffin, but he indicated he was not aware of how many kinds of package situations the department had looked at through their audit process. Again, he offered to get the information if the committee would like to have it.

Mr. Whittemore said they were certainly not trying to create a fiscal problem. He stated if there was one, it meant that they were generating taxable transactions when they were not supposed to be subject to a tax. Senator Coffin said that was exactly where he was going, because if people really examine some of the things that were taxed, it was possible to find things that should not be taxed. He noted he tried to think of other industries and other services that combine service and product in a transaction, that maybe have been improperly taxed. Chairman McGinness stated that he understood Senator Coffin’s question, but he was not sure there was enough time left this year for the committee to make that determination. Senator Coffin noted that might be why Mr. Pursell was asking for regulatory control as opposed to statutory change.

Merritt K. (Ike) Yochum, Lobbyist, said having been a victim of the creativity of some of the Department of Taxation’s personnel, he had suffered a great financial loss, because of their interpretation. He had to get a lawyer, go through court, and, he said, it was very expensive. Mr. Yochum indicated if this bill was going to prevent this sort of creativity, then he was all for it.

Amy Halley Hill, Lobbyist, Las Vegas Chamber of Commerce, said they also support this legislation. She indicated it had long been their belief that the Department of Taxation should be a tax collector not a tax generator, and they were very encouraged by the words they heard from Mr. Pursell, and the new vision of the Department of Taxation. She indicted the chamber’s support of this legislation and she said they thought it was important that the Legislature gave the directive to the Department of Taxation.

Mary L. Lau, Lobbyist, Retail Association of Nevada, indicated that she had sat through several hearings of the Department of Taxation previous to Mr. Pursell being there, and noted there was a lot of confusion on this issue and the auditors were somewhat adamant in their position, even though they had been advised of business’s position. She said for the record that the Nevada Taxpayers Association, via Carole Vilardo, asked her to make sure that the committee understood that this bill was a strict construction for the Department of Taxation whereas the Taxpayers’ Bill of Rights is liberal construction for taxpayers. She said Ms. Vilardo wanted that difference clarified. Ms. Lau indicated that the Retail Association of Nevada strongly supports this bill.

Chairman McGinness closed the hearing on Senate Bill 522, and began the Work Session with Senate Bill (S.B.) 262.

Larry W. Bennett, Lobbyist, Nevada Cement Company, noted Senate Bill 262 was their proposed legislation, which was heard several weeks ago. He said since that time the Department of Taxation, their legal counsel, as well as Paul Bancroft had been working on the amendments presented to the committee (Exhibit F). He indicated to his knowledge there was no opposition to this bill at that hearing.

Chairman McGinness indicated to the committee that these were the proposed changes and asked Mr. Bennett if there were any huge changes. He noted that in section 1, paragraph (b) the property has to be used continuously in foreign or interstate commerce. Mr. Bennett confirmed that was correct, noting the continuous use was for a period of not less than 12 months following the start of the interstate or foreign commerce both within and without Nevada.

Senator Rhoads asked if this meant that the units would be proportionally taxed in Nevada for 3 months, if, for instance, they were in Nevada for 3 months and they were out of state for 9 months. David Pursell, Director, Department of Taxation, said in order to put into statute what the department has consistently done in the past, they asked that the bill indicate that "used continuously for a period of not less than 12 months" be included in the bill. He said he understood that would meet the criteria to determine that there would not be the tax on that type of property if it met that 12-month criteria.

Senator Neal referred to page 1, line 3, and asked what NRS 372.255 was and what it did since the amendment was removing it.

Chairman McGinness replied that basically it was on line 3 of the first page of the amendment. He explained that Paul Bancroft was to have been here today to answer any technical questions. Senator Neal read from the appropriate NRS section and asked why that was being removed. Mr. Pursell replied that was Mr. Bancroft’s request. Chairman McGinness said the new language in the amendment says "it is presumed that tangible personal property delivered outside this state to a purchaser was not purchased from a retailer for storage …" and he believed that when Senator Neal read NRS 372.255 it said, "was purchased." Senator Neal concurred. Senator McGinness confirmed that this new language says, "was not purchased." Mr. Bennett said the purpose behind this bill originally was to clarify, in the statutes, when tangible personal property was and was not taxed, and so the presumption was changed from "was purchased" to "was not purchased" for storage.

Senator Coffin said this should be perfectly clear now to the purchasers of these kinds of equipment and he thought that this amendment does what the proposers and the tax association wanted.

Chairman McGinness adjourned the meeting at 3:25 p.m.

RESPECTFULLY SUBMITTED:

Mavis Scarff,

Committee Secretary

APPROVED BY:

Senator Mike McGinness, Chairman

DATE: