MINUTES OF THE
SENATE Committee on Taxation
Seventy-First Session
April 5, 2001
The Senate Committee on Taxationwas called to order by Chairman Mike McGinness, at 2:07 p.m., on Thursday, April 5, 2001, 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:
Kevin D. Welsh, Deputy Fiscal Analyst
Rochelle Trotts, Committee Secretary
OTHERS PRESENT:
Gaylyn J. Spriggs, Lobbyist, Nevada Taxpayers Association
David Pursell, Executive Director, Department of Taxation
Maureen Brower, Lobbyist, Nevada Association of Medical Products Suppliers
Thomas J. Grady, Lobbyist, Nevada League of Cities and Municipalities
Marvin Leavitt, Lobbyist, City of Las Vegas
Fred L. Hillerby, Lobbyist, Regional Transportation Commission of Washoe County
Ed Gobel, Lobbyist, President, Council of Nevada Veterans Organizations
Alan H. Glover, Lobbyist, City of Carson City, and County Fiscal Officers’ Association
Robert Spencer, Transfer Tax Auditor, Recorder, Clark County
Pat Coward, Lobbyist, Nevada Association of Realtors, and Nevada Land Title Association
Dave Evans, Concerned Citizen, Representing Nevada Land Title Association
Kathy Burke, Recorder, Washoe County
Chairman McGinness:
We will open the hearing on Senate Bill (S.B.) 528.
SENATE BILL 528: Clarifies provisions relating to taxation of medical devices sold to governmental entities. (BDR 32-1134)
Gaylyn L. Spriggs, Lobbyist, Nevada Taxpayers Association:
The reason for this bill is getting suppliers to service Medicaid and Medicare patients or to provide medical items to the patient with contracts to the State of Nevada. An interpretation of our tax exemption statutes says there is no sales tax when a supplier contracts with the United States government or the state government. We had problems with suppliers providing services or medical devices to the patient without paying sales tax. The suppliers had to pay back sales tax because they said the state did not take title to the medical device before it was provided to the patient. What we would like to do is to clarify the sales tax exemption applying to those situations.
The way the bill was originally drafted left it open. The amendment (Exhibit C) narrows it to where the exemption for the sale of a medical device to a governmental entity that is exempt, pursuant to this section, is exempt: if the medical device was ordered by a licensed provider of health care, if the device is covered by Medicare or Medicaid, and if the provider has a contract with the Department of Human Resources for providing the device.
Senator O’Connell:
I would like to request the Department of Human Resources be brought before this committee to explain to us what happened. We had a company contracting with the state, as the human resources department, who were told for the price they were going to supply hearing aids, they would be tax exempt. So, they agreed, went into the contract, and supplied the hearing aids for the people the government was serving with Medicaid. All of a sudden, our Department of Human Resources changed the rules on them. They were audited and told they owed these back taxes. The supplier said, “I went into this contract in good faith with you, and I have been holding up my end of the bargain, and all of a sudden you are claiming you have not taken title so you are not going to give us the tax-exempt status.” This has come before the Nevada Tax Commission and they have been in a quandary because of the way the old law reads. This again was something done through human resources and they have no explanation, and have not given the people they had initially contracted with any explanation about why the department will not take title, and have withdrawn the exemption without the supplier being made aware of it. I wonder if we could have that department come and explain to us why they took the action they took.
Chairman McGinness:
There was no problem until the Department of Human Resources quit taking title to the devices and once that happened they were no longer tax-exempt.
Ms. Spriggs:
The Department of Taxation did an audit and while they were doing the audit they realized the Department of Human Resources was not taking title and said, therefore, you are liable for the taxes and assessed quite a bit of back tax. It was a combination of doing the audit, finding it, and the person not being aware title was not being taken.
Senator Neal:
Mr. Chairman, as you recall we had an issue before this committee to exempt hearing aids and this committee refused to do that, so, it is not a part of our statute right now. I do not blame the state for not going along with this. Now we are confronted with an issue where the state tells us they have to pay taxes on it, and in my judgment they are supposed to pay taxes. We did not exempt them.
Ms. Spriggs:
A case where it is Medicaid or Medicare, and the state actually pays for the hearing aids, it is tax-exempt because they pay for it and the recipient does not pay anything at all. Normally, when you have the federal government or the state government purchasing something they do not pay the sales tax, which was a different situation than the people going in themselves and buying it.
Senator Neal:
There are statutory laws that you have to pay some type of tax. If the government agency purchases equipment and allows the equipment to be used by persons under their care, there is a tax due. That happened with the individual contracts at the test site. They did not want to pay sales tax on the equipment being used and they charged them with the use-tax. They went to court and ended up settling the case because they could not win it, and the court said they had to pay.
Chairman McGinness:
The person receiving the free Medicaid hearing aid would have to pay the use‑tax, but in this case the dealer who made a deal to provide the hearing aids had a contract with the state that there was no sales tax. Then when the audit came, they did want the tax.
David Pursell, Executive Director, Department of Taxation:
How this came to the attention of the Department of Taxation was through an audit, and that is precisely what happened. These were sales either through Medicare or Medicaid. The advice to the Department of Taxation is that we could not rely on the definition of a medical device in chapter 639 of Nevada Revised Statutes (NRS). The definition has to be under Title 32 of NRS for the sales-and-use-tax statutes. That is where Senator Neal is correct; hearing aids are not specifically exempt under Title 32. For a time though state Medicaid did take title of purchases of medical devices and then decided not to. So the controversy that came before the Nevada Tax Commission was, is it an even playing field for medical suppliers who are supplying these kinds of devices to a Medicaid purchaser? Medicaid will not reimburse on the sales tax. The suppliers end up being noncompetitive because we will charge the sales tax because we have to follow title and possession.
It is my understanding when I look at this amendment (Exhibit C), that it would specifically apply to medical devices that are purchased for either Medicaid or Medicare. It would not apply to me going in and buying a hearing aid that is not subsidized by the federal government. The Nevada Tax Commission did accept that advisory opinion at its April 2 tax commission meeting.
Chairman McGinness:
I have a lengthy copy of the opinion if any member of the committee wants one, we could get you a copy.
Maureen Brower, Lobbyist, Nevada Association of Medical Products Suppliers:
The association is strongly in support of this bill and the amendment and feels it would answer a lot of questions currently that have become a problem in law.
Senator Neal:
The amendment only applies to companies selling medical supplies?
Chairman McGinness:
The companies will be supplying to the state either for Medicaid or Medicare.
Senator Neal:
The companies would be getting the exemption.
Chairman McGinness:
That is correct.
Senator Neal:
An individual needing a hearing aid would not get the exemption, is that what I understand?
Chairman McGinness:
Yes. We will close the hearing on S.B. 528 and open the hearing on S.B. 529.
SENATE BILL 529: Revises provisions relating to assessment and collection of certain taxes remitted to each county. (BDR 32-342)
Mr. Pursell:
Senate Bill 529 came about through the Governor’s fundamental review of the Department of Taxation. There is an administrative cost to local governments of 0.75 percent on the collection of sales-and-use tax. The question to the department was, why is that not applied to the revenues collected and distributed through our centrally assessed properties? Section 1 of the bill is the taxes collected and distributed from private car lines. Sections 2 and 3 are from construction work in progress and utility companies. Section 5 is revenues collected and distributed on the net proceeds of mines. After discussion, it was determined by the Executive Branch we should be consistent. If there is an administrative cost on the sales-and-use tax collection and distribution that is charged to the local government, for consistency purposes, it should also apply to the centrally assessed revenues.
To give you an idea, the following figures are for fiscal year 2000. The total amount of net proceeds of mines revenues collected and distributed was $14.5 million; 6-month construction work in progress on utilities was $58.5 million; property escaping taxation was approximately $215,000; private‑car lines was $99,000; 12-month construction work in progress on centrally assessed utility properties was $2.5 million. The total from all sources was approximately $75.9 million on the centrally assessed revenues, and 0.75 percent to be withheld for administrative cost on that amount would be approximately $569,700. We would handle these the same way as the 0.75 percent on the sales-and-use tax. It does not go into the Department of Taxation’s budget; it is deposited to the General Fund.
Senator Neal:
The withheld amount would be 0.75 percent?
Mr. Pursell:
Yes.
Senator Neal:
Can you tell me if this is new and is it consistent with any other withholding that you engage in?
Mr. Pursell:
It is the same as the 0.75 percent withheld on sales-and-use tax that we are currently withholding as an administrative cost to the local governments.
Senator Neal:
Therefore, it is consistent.
Mr. Pursell:
Yes.
Thomas J. Grady, Lobbyist, Nevada League of Cities and Municipalities:
Three sessions ago we were paying 0.05 percent for the sales tax. There was a General Fund shortage and local governments were increased 1 percent. We questioned why these assessments would be assessed for us because, as Mr. Pursell stated, this does not go to the Department of Taxation. This goes to the state’s General Fund. The 0.75 percent that we are paying on the sales tax pays practically the whole Department of Taxation’s budget. Now we are assessing another 0.75 percent on centrally assessed that will again go into the General Fund. We keep taking money away from the local governments to give to the state with no way for the local governments to increase their revenue. There is nothing that says next time the state cannot come back and say let us raise each of these to 1 percent, 1.5 percent or 2 percent. Our revenues are going down just like the states and we are trying to serve the same constituents. Many of our areas are having declines in sales tax revenue, assessed valuation, and also in centrally assessed. We feel this is blatantly an unfair tax to arbitrarily put on the local governments to strengthen the state’s General Fund.
Senator Neal:
Is this not the taxes that are presently collected by the tax department?
Mr. Grady:
Yes it is. We are still paying from the 0.75 percent of the sales tax. We are paying our fair share.
Senator Neal:
These are taxes presently collected and if that is the case then why should they not charge a fee for collecting it?
Mr. Grady:
We are not objecting to charging a fee. We are objecting to paying the whole operation of the Department of Taxation. This is in excess of the total budget of the Department of Taxation. The Department of Taxation handles things other than local government. Our portion is a small portion of what the Department of Taxation does.
Senator Neal:
Mr. Pursell, how much would this be over and above your present operation?
Mr. Pursell:
The projections for the Economic Forum on the General Fund commission for fiscal year 2002 are $13 million, and for fiscal year 2003 are $13.7 million. The budget proposed by the Department of Taxation to include a one-shot appropriation for a computer, second-phase system, for fiscal year 2002 is $17.1 million, and for fiscal year 2003 is $17.8 million.
Senator Neal:
That is your present budget request? The $13 million is the additional money that would be raised by this assessment?
Mr. Pursell:
No, it does not include this one. That is just the 75 percent on sales-and-use tax collections, not the centrally assessed proposed in this bill.
Senator Neal:
How much does this 75 percent raise each year?
Mr. Pursell:
It raises approximately $569,700.
Senator Neal:
That is the amount, in addition to what you would take out with the 75 percent that would go to the General Fund, the $569,700.
Mr. Pursell:
The $569,700 would be in addition to the $13 million for fiscal year 2002, and to the $13.7 million in fiscal year 2003.
Senator Neal:
The $569,700 is over and above what your budget request is at the present time?
Mr. Pursell:
It is not part of our budget. It does not go into our budget; it is a direct deposit into the state General Fund.
Ms. Spriggs:
We are in opposition to the bill because it is a direct pass through to the General Fund and is a revenue enhancer. We are opposed to that.
Chairman McGinness:
We will close the hearing on S.B. 529 and open the hearing on S.B. 557.
SENATE BILL 557: Makes various changes concerning distribution of certain revenue from tax on certain motor vehicle fuel. (BDR 32-893)
Marvin Leavitt, Lobbyist, City of Las Vegas:
Five years ago we began a study of the distribution of a portion of the motor vehicle fuel taxes. We originally began the study with the University of Nevada, Las Vegas, which did not turn out favorable, and later we used the Nevada Department of Transportation to do some of the work. This was an attempt to look at the fuel tax distribution, which had not been reviewed for many years, to see if the current way of doing it was fair, and to see if we might devise or determine a better way. There was a special committee appointed, to review this bill, composed of public works’ types from the various communities around the state representing both the cities and the counties. Of the membership of this committee, I was the only one not a public works’ type, but I was familiar with the roads. This was purposely designed so they would have knowledge of the cost as they go into make up the expenses they incur as a result of roads.
Mr. Leavitt:
When we started this process the taxes were distributed. Remember this was from the statewide collection to the county level where anything that goes below the county level has to be done at a later time. This does not include that. This distribution was one-fourth in proportion to total area, one-fourth in proportion to population, one-fourth in proportion to road mileage and street mileage of non-federalized primary roads, one-fourth in proportion to vehicle miles to travel on non-federal-related primary roads.
One of the first things we found was that various entities around the state were using, in their calculations of miles of roads, roads that were the responsibility of the state Department of Transportation. These are roads on which they did not have any maintenance or construction responsibility. So, one of the first decisions we made was we should exclude those type of roads from the calculations. If you did not have responsibility to maintain them, you should not include them in your inventory of roads that are to become a part of the formula.
Senator Rhoads:
Do they have to be paved?
Mr. Leavitt:
They do not have to be paved.
Senator Rhoads:
The definition of a road is, if it is maintained then it is a road.
Mr. Leavitt:
That is correct for which the county or the city has the responsibility. One of the difficulties we had is we needed to include miles of roads as part of the formula for a definition. We originally took the approach to see if we could determine how to come up with different classifications of roads,even unpaved roads can differentiate graveled from dirt roads. One day the Nevada Department of Transportation took the committee to a road and just in a space of two to three miles we went all the way from a road that was as close as possible to a paved road, but still remained unpaved, to the end of the road where it was almost a jeep trail. We saw it would be impractical and extremely difficult to try and classify these roads.
Let me give a comparison between roads that are maintained by various entities. There is Summerlin Parkway in Las Vegas that is a multilane freeway. Then there is a dirt road going across the desert with very little travel on it. How do you get some relationship between these kinds of roads? They are all the responsibility of differentgovernments and could be a problem. What we had to determine was how to classify the roads and also how to recognize unusual situations. The fact was one part of the state would have to maintain roads that have ice and snow on them, whereas the people from Clark County have floods that tear up their roads and the roads have to be repaired. How do you handle the roads that have four lanes across as opposed to the roads that have two lanes, and roads that have different widths? When you think oftrying to do that, it becomes almost impossible.
So we decided, based on recommendations of the Nevada Department of Transportation, to use the miles of road, not including lane miles, just the center line miles of a road, and use that as a basis. We would not try to differentiate between dirt roads, gravel roads, and paved roads. They would all count the same. We decided the difference in usage could adequately be measured by population. We finally came up with a formula based two-thirds on population and one-third on road miles. The attempt would be to recognize if you weigh population higher, you take into consideration the fact the areas having the greatest population are the ones having multiple lanes. They have roads that have greater traffic on them. We figured we could make a fairly simple formula that is easy tomaintain, and would work for the future.
We held hearings over the years and traveled to various communities to inform everyone about the situation. We knew we had an inadequate road inventory and so we provided for annual submissions, with audits no less than every 10 years by the Nevada Department of Transportation. The idea being we wanted to maintain for the future an adequate road inventory and not let it get out of sync. In some areas we felt the roads had not actually been physically remeasured for many years. So, each of the counties and cities had a responsibility, as part of this project, to submit new road inventories that couldbe used in the new formula.
Mr. Leavitt:
We had a fear, as a result of converting to a new formula, we would have some entities that would have a considerable loss in revenue. In general the counties of the largest area and the fewest people would be the ones that would probably, or particularly in the near future, lose money under the system. We came up with a system where we hold everyone harmless so they would not lose any revenue from the amount they are receiving in this fiscal year 2001. As long as the total money available was equal to this fiscal year they would not lose any money regardless of what the formula wouldgive to them. The extra money coming into the formula, as a result of growth in the formula, would then be distributed based on this new formula.
We had runs by the Nevada Department of Transportation with fairly wide distribution. Though we do not know what will happen in the future, we saw this relationship was valuable and one that will hold for the future regardless of what happens. We have provided for the audits, the implementation of this formula, and for a base guarantee. A question arose during the process whether we were making a mistake in not providing for some kind of a cost‑of‑living guarantee. So there is a cost-of-living formula built into this formula so each individual county is guaranteed they have some recognition of a cost of living. In most taxes, we should have a cost-of-living increase. If this was a sales tax, there should be a cost-of-living guarantee built into it. But, the problem with this tax, it is not based onthe price of gasoline, it is based on gallons of gasoline. It does not recognize in the tax itself any change in the price level, it changes only by volume. If you look at sales tax, it changes by both volume and price levels as it is reflected in the price of goods; gasoline is a different animal. The only way it moves is by volume changes, because of that, the CPI (Consumer Price Index) change is not recognized in the bill.
Mr. Leavitt:
We provide a means by which, on an annual basis, if a local government feels their road-miles as accepted and used by the Nevada Department of Transportation for the formula, is not right, they have an appeal process. They appeal first to the subcommittee that has done the work on the formula itself and thenfinally to the extension of the tax distribution committee. One of the problems we have, and even in the proposed extension of the tax distribution committee, it would only go to the year 2005 and this is a permanent set-up. There is another provision that after the year 2005 it would essentially go to the Committee on Local Government Finance, which would serve the same function as the tax distribution committee and also would report to the Legislative Commission. The bill is a little confusing in that it has to handle those two different situations because of the limited time frame of the one committee. If this Legislature extends the committee to the year 2005 and when you actually arrive in the year 2005, I would expect it appropriate to continue the same committee set-up.
In the rural counties as we went around and held these meetings, we all stated our desire to develop a formula that fairly represents the relative responsibility that everyone has for roads. The people representing many of these rural counties knew whatever we did was not going to be particularly favorable to them because of the huge growth in some areas of the state. But interestingly,even though they knew the end result was not going to be favorable to them, they spoke in favor of it. When I asked questions about how they felt, they spoke favorably for it because they knew it was faireven though it was going to be adverse to what they would prefer to have, and was adverse to the position they had originally taken. Now that says something and is a real compliment to these people and their desire to have something that was fair, even if it was not favorable to them financially.
Senator Rhoads:
Will the counties or the Nevada Department of Transportation do this inventory every year?
Mr. Leavitt:
The inventory will be done every year with an audit, no less than once every 10 years.
Senator Rhoads:
How much money is going to be shifted from the rural counties to Clark County?
Mr. Leavitt:
Immediately, there will not be any revenue shifted because everyone has a guarantee. The only thing that is going to make it up is the growth, and we are guessing when we do growth. One thing we have done, when doing these studies, is we have come up with the idea of fairness before we run the numbers. The problem with any of it is right now we do not know what the growth is going to be in any of the counties over a long period of time. We know we have had a lot of growth in Clark County but we see the rate diminishing fairly significantly over the last year. As to what will happen in the future we do not know, but we do know it will be based on this formula if adopted, which is two-thirds population and one-third road miles.
Senator O’Connell:
I would like to thank Marvin Leavitt and Kevin Welsh in visiting every county, some more than once, and working very hard in getting the information of 5 years condensed into several pages on this formula and study. It has been 60 years since anybody has looked at this and tried to get people together and come to any kind of an agreement. This was not an easy task and the committee is indebted to them for all their work.
Fred L. Hillerby, Lobbyist, Regional Transportation Commission of Washoe County:
We are in support of this bill and also echo Senator O’Connell’s praise for Mr. Leavitt and Mr. Welsh who worked very hard on this and our agency thinks this is a long-overdue step.
Chairman McGinness:
We will close the hearing on S.B. 557. Senator Rhoads has a subcommittee meeting on Tuesday, April 10, 2001, and the meetings next week will be devoted strictly to work session.
We will continue with a work session, starting with S.B. 72 and Senator Coffin has made a motion to reconsider.
SENATE BILL 72: Revises definition of “basic cost of cigarettes” for purposes of regulation of sales of cigarettes by wholesale dealers. (BDR 32-684)
Senator Coffin:
I gave notice of reconsideration on Tuesday.
SENATOR COFFIN MOVED TO RECONSIDER S.B. 72.
SENATOR TOWNSEND SECONDED THE MOTION.
Senator Coffin:
On the initial vote, I was going to vote against the bill, but simply through human error made a mistake and voted for the bill.
THE MOTION CARRIED. (SENATORS RHOADS AND NEAL VOTED NO.)
*****
SENATOR RHOADS MOVED DO PASS S.B. 72
SENATOR NEAL SECONDED THE MOTION.
THE MOTION FAILED. (SENATORS TOWNSEND, MCGINNESS, O’CONNELL, COFFIN, AND SCHNEIDER VOTED NO.)
*****
Chairman McGinness:
Let us look at S.B. 156.
SENATE BILL 156: Makes various changes concerning exemptions from property and vehicle privilege taxes for veterans. (BDR 32-124)
Ed Gobel, Lobbyist, President, Council of Nevada Veterans Organizations:
Nevada, the state with the highest concentration of veterans of any state in the nation has the least amount of benefits and services to veterans of any state in the nation. After 48 years since S.B. 182 in 1953 was passed giving veterans a bonus in the form of a property tax exemption, the exemption has been eaten away by inflation. Do something to say what veterans did for this country was worth fighting for. If you ever expect to have people fight for it again, please stop coming up in every legislative session with excuses. We are last on the totem pole as veterans for everything.
SENATE BILL 182 OF THE FORTY-SIXTH SESSION: New revenue code providing for change to fiscal year.
Ed Gobel:
Every day on the veteran’s hotline in Las Vegas we get an average of 14 veterans a day who are dying and need burial assistance. More Vietnam Veterans now call than World War Veterans which means in approximately 15 years you can calculate into your projections there will be very few, if any, veterans who served in time of war.
This is not a tremendous impact on most of the counties if you want to phase it in or do something. But, do something to show there is some consideration for veterans in the state. I heard at the last hearing about means testing, nobody means-tested us when we went into the service and fought for our country. I ask you to consider this in some fashion to show you appreciate the contributions veterans have made.
Chairman McGinness:
I asked the Department of Taxation for the total revenue loss by county (Exhibit D) on this bill. If you look at the fiscal note on this, it mentions $1.5 million the first fiscal year and $1.6 million the second fiscal year. I asked the Department of Taxation just to look at the counties I represent. Assemblyman Neighbors and I have a bill in to give Mineral County $300,000 because the county is in default. They have done everything the right way. They have laid off people, their property values have gone down and they have lost population. This would cost them $21,000. In White Pine County, we know the fiscal situation there, and it would cost them $31,000. I fully appreciate what you are saying, Mr. Gobel, and I think we are way behind times. I cannot say enough about the veterans, but we also have veterans living in these counties who will also be affected by the loss of these revenues.
Senator Rhoads:
Mr. Grady, have the cities or counties ever taken a position on this? The NACO (Nevada Association of Counties) has never participated in any of this discussion?
Mr. Grady:
We have not taken a position. Senator McGinness has expressed our concern with the rural areas that continually are seeing less and less money. Where do we make up the lost revenues? I do not think there is anyone in Nevada who would ever speak against what the veterans have done, and we all appreciate them, but, again, we are fighting for our survival in the rural areas and we cannot afford any more hits.
Mr. Gobel:
I believe the counties have in the past agreed not to oppose this bill and the county assessors have supported it. We fought for this country’s survival and other people have gotten the benefits. These are earned benefits and this was the promise in 1953, which has been abandoned by this state.
Senator O’Connell:
Mr. Gobel mentioned we do a phase in. I recommend we do a phase in of 25 percent a year for the next 4 years.
SENATOR O’CONNELL MOVED TO AMEND, BY PHASING IN A 25 PERCENT YEARLY INCREASE IN THE VETERAN’S PROPERTY TAX FOR 4 YEARS, AND DO PASS AS AMENDED S.B. 156.
SENATOR RHOADS SECONDED THE MOTION.
Senator Neal:
For all of the exemptions listed?
Chairman McGinness:
Yes. At the end of 4 years we would have doubled the veteran’s exemptions, it would go from 1.25 percent to 1.50 percent to 1.75 percent over the current levels.
Senator Rhoads:
Their last raise was in 1953.
Senator Neal:
The property tax would go to 12.5 percent for the first year.
Chairman McGinness:
There is also a CPI amount, which would have to be CPI’d after the 4 years. A 25 percent increase per year from $1000 to $2000 over 4 years and then following that the CPI increase would kick in at that point.
THE MOTION CARRIED. (SENATOR NEAL ABSTAINED FROM THE VOTE. SENATOR MCGINNESS VOTED NO.)
*****
Chairman McGinness:
Let us consider S.B. 238.
SENATE BILL 238: Makes various changes relating to tax on transfer of real property. (BDR 32-138)
Mr. Glover, is there any opposition to the bill?
Alan H. Glover, Lobbyist, City of Carson City, and County Fiscal Officers’ Association:
No, we are all in agreement on the bill but there is an amendment (Exhibit E). The basic idea with working with the Nevada Department of Taxation and the Nevada Taxpayers Association was to completely reorganize the bill into various sections. In the amendment, page 1, section 2 lays out the Taxpayers’ Bill of Rights for Taxes on the Transfer of Real Property (Taxpayers’ Bill of Rights) that we have placed into the bill. There were some deletions from the original bill. One of the problems with the original bill was in drafting they did exactly what we asked them to do. They took everything out of chapter 360 of NRS and put it into this bill. They mixed the Taxpayers’ Bill of Rights in different sections, including sales tax background, so, we cleaned it up to make it apply to this section. One of the main focuses in these amendments is to pin this tax down to real property transfer tax so it does not apply to all of the properties someone may own, only the piece of property for which the tax was not paid. Under the original bill we could have liened everything these people owned.
On page 3, of the amendment (Exhibit E), section 11 shows exactly how an audit should be done, and there appears to be no controversy. On page 4, section 13, are the waivers of penalties and interest, and it does not seem to be controversial. Section 14 deals with refunds and how they occur. Section 15 is the due process portion. On page 5 right above subsection 3, there is a line that says, “A decision of the hearing officer is a final decision for the purpose of judicial review.” It was pointed out we should have a time period in there when judicial review must commence. Our district attorney recommended 30 days but 45 days would certainly work.
Mr. Glover:
One of the main changes in this bill was the substitution of a hearing officer for the Department of Taxation, and from the hearing officer if you still disagreed, then you proceed to district court. It is a streamlined process cutting out the state Department of Taxation and the Nevada Tax Commission completely and replacing them with hearing officers, which the county would appoint.
Page 5, section 17 (Exhibit E), is the lien process, and when you come down to the final portion you start to lien. On page 6, section 21 (Exhibit E), we have added general provisions. We would propose an amendment to the new language on page 6, section 21, subsection 2 (Exhibit E), where the bold italicized language says, “a deed of trust or common law mortgage instrument which encumbers real property,” then bracket and remove “and does not convey title,” and leave the rest of the language as it is.
Senator O’Connell:
How far do we allow the lien to go?
Mr. Glover:
We have pinned it down, if the tax is not paid, and the hearing officer agrees with the county, and the district court agrees the tax was owed, you can only lien the piece of property for which the tax was not paid.
Senator O’Connell:
Do we have penalties and fees going on the whole time the property is liened?
Mr. Glover:
That is in the statute now. There are penalties and interest when the tax is not paid.
Senator O’Connell:
We are now allowing somebody to pay their taxes in quarterly amounts, are we not?
Mr. Glover:
No, this is a tax that must be paid at the time the deed is recorded.
Robert Spencer, Transfer Tax Auditor, Recorder, Clark County:
What we are talking about in the lien and collection process are those recorded deeds but for some reason an exemption might have been declared at the time of the recording. A subsequent audit discovered the exemption did not apply and transfer tax was due. Therefore, we are trying to collect it. Two years ago when I was here we were due about $1.115 million because there was no real collection or statutory process. We have only been able to collect $275,000 and the other $800,000 plus have gone by the wayside, because the statute of limitations has expired. This is to give us a statutory mechanism to do the collection after the deed has been recorded, but the tax should have been paid.
Mr. Glover:
On page 7, paragraph (b) (Exhibit E), new language has been added to determine the value in the case of a gift of a deed with nominal consideration which is, “Such price may be derived from the assessor’s taxable value, or the prior purchase price, if within the previous five years, whichever is higher.” It gives you only two choices to set the value. The language should remain the way it is.
We have another amendment (Exhibit F). At the top of the page it says “Page 8 of Amendments, section 24.” The new number 7 (Exhibit F) was number 8 (Exhibit E) which says, “A transfer of title to or from a trust . . .“ should be item (b) (Exhibit F) which says, “the trustor’s legal representative.” We should add the definitions in NRS 167.020, subsection 9, and NRS 132.045, which gives the definition of a legal representative.
Chairman McGinness:
Would this language replace the current number 7?
Mr. Glover:
Yes.
On page 9, section 25 (Exhibit E), we are in agreement. The present language in the statutes says, “The county recorder shall refuse to record any deed or conveyance upon which a tax is imposed by this chapter if the tax is not paid.” We would like to add, “and is not subject to liability for refusing to record a deed or conveyance for which a tax imposed pursuant to this chapter has not been paid.” Page 10 (Exhibit E) has miscellaneous provisions and these are ones we added towards the end. They were in the original bill completely rearranged and laced at the end of the bill.
There is a problem in section 32 of the bill on page 11. What happens under this situation as this proposed language goes? For example, if Kevin Welsh sells a house to me (Mr. Glover) and the tax for some reason is deficient, then I sold the house to Bob Spencer and Mr. Spencer sold the house to Senator Coffin. Under the lien process we could lien Senator Coffin’s house, and he is an innocent party. We want to go after Mr. Welsh because he is the one who owed the tax. We will have word changes that make it sure we go after only the person who actually did not pay the tax. We do not want to injure an innocent third party. We are all in agreement, we do not want to lien somebody’s property after it has been sold to another party.
Senator O’Connell:
How could a person accept the sale of a house if there was a lien on it, and could not get clear title?
Mr. Glover:
There is no lien yet. There is a hidden lien in there because the auditor is still doing his audit. We have a 3-year period and within that 3 years title had changed while he is still auditing. At the end of the 3 years he says Mr. Welsh owes $100,000. What might happen is a practical matter of a death in the family and title starts moving, or there is a legitimate change.
Senator O’Connell:
It would not show up in a title search at all?
Mr. Glover:
No. We did delete from this version the objections of the Nevada Mining Association on deleting the exemption for unpatented mining claims. We tried to accommodate every group.
Senator O’Connell:
In our real estate law, do we not have a disclosure where it would be incumbent upon the seller to disclose there is an audit going on?
Mr. Glover:
The person may not know because the audit has not started yet.
Senator O’Connell:
Tell me how the audit begins and you do not know you are being audited?
Mr. Spencer:
The selection of real property for audits are looked at in terms of what a property sold for previously, what the assessor says it is worth, and the current declared values. We have had properties where the declaration of value are mixed up with other properties. We have collected transfer tax on a home that would have sold for $1 million and they have a declaration of value showing $125,000. We go out and audit the record. Sometimes they are easy to clean up. The title company did, in fact, escrow the correct amount or sometimes the title company has escrowed the correct amount but they have refunded back to the seller or the buyer, whoever paid the tax at the time of closing. So this becomes a real issue of whom do we collect it from? We did amend the statute last time to say, “the buyer and seller jointly and severally,” so we can go after both.
Senator O’Connell:
There should be some notice given to the current owner of the home, if an audit is being given, if they are selling the home.
Mr. Spencer:
In most of the escrow files I examine at title companies, there is a disclaimer in the file saying it is subject to an audit by the recorder’s office in that county. Everybody is aware at the time of closing it is subject to an audit.
Senator O’Connell:
If you are notified at the closing of a sale, then that is something that should be a part of the disclosure to the person buying it.
Mr. Spencer:
Buyer and seller are both aware of it at the time, but if it is him-to-him and then I go from him-to-me, I would not be aware of the value difference. I might have paid the correct amount of transfer tax on the purchase price from Mr. Glover but the purchase price between Mr. Welsh and Mr. Glover would have been deficient.
Senator O’Connell:
Is there no way that can be flagged in the sales so that you do not have a buyer be unaware?
Mr. Spencer:
Not every escrow is audited; it is just subject to an audit.
Senator O’Connell:
A person has the right to know if they were purchasing the home, if the seller is hard to find, whom would you go back on if you could not find Mr. Welsh?
Pat Coward, Lobbyist, Nevada Association of Realtors and the Nevada Land Title Association:
The audit process started this whole issue 5 years ago. It is a routine process they go through to verify they are accurate. We have a new value declaration form and we try and get both the buyer and seller to sign the value declaration form but the requirement is only one of them is required to sign. It is basically trying to “true up” the numbers. The exemptions are where a lot of the problems occur. It is not so much on the actual transaction of a residential house but falls into those exemptions.
Senator O’Connell:
Is there any information given to the buyer at the title company that would have indicated this sale could be audited, or there is a transfer tax problem? Is there anything we could do to shed light for a person who might be unsuspecting of our laws?
Dave Evans, Concerned Citizen, representing Nevada Land Title Association:
What we have done to alleviate the problem that Mr. Glover set forth, was to have a mechanism for the county and the recorder’s office to lien the property of the wrongdoers, being the buyer and/or the seller that did not pay their correct transfer tax. What happens, since you have 3 years to look into this, the particular buyer and seller are no longer involved in the property and it is transferred to another owner? Now you are going to go back to this transaction and figure it out, because these people improperly paid their transfer tax, you are going to lien their property. That is not fair to the other people. Everyone is in agreement, so we are not going to do that any longer. I have not seen the new language but my understanding is, it is only going to be a lien against the property if the parties who actually caused the infraction, and did not pay the proper taxes, are still entitled to the property. In other words, you will not be able to lien the property two tiers down. We would have no way of knowing and we could not disclose to a party there may be some kind of a lien someone transferred to your home two transactions ago and they may not have paid the proper transfer tax, and we do not know if the recorder has gotten around to auditing or not.
Senator O’Connell:
If you have a husband and wife and the husband is selling the home, the wife is not educated in these matters, the husband dies, the wife now has no idea there is a lien on the property and all of a sudden she does not have the money to pay that tax. Who will be responsible?
Mr. Evans:
In that particular situation, that would be an exemption under the current statute and would not be taxable. There would be no transfer tax due.
Kathy Burke, Recorder, Washoe County:
Senator O’Connell, you would like the current owner to be notified there could possibly be a lien pending from a previous owner if the property has been purchased within the 3-year period. Possibly through escrow they could disclose the house has been sold within the 3-year period and could be subject to a lien. The only place it would fall short would be if they did not go through escrow.
Senator O’Connell:
That would be very helpful to make the new owner aware there could possibly be a lien on the property even though it is not the buyer’s debt.
Mr. Spencer:
The declaration of value form that is supposed to be signed by both parties has disclosure language in it, as well as the fact they are subject to a 10 percent penalty plus 1 percent interest per month.
Senator O’Connell:
You stated both parties do not have to sign the declaration of value form.
Mr. Spencer:
That is pursuant to what the Department of Taxation said. Virtually all real estate transactions that I audit do have both parties sign. Most of the title companies make it their policy even though only one is an absolute requirement. They are the ones who got the Department of Taxation to back off because not all cases have both parties available to sign the declaration of value form. I have yet to audit a file that both parties did not sign it.
Mr. Glover:
The worst-case scenario would be we just do not collect the tax because we have nothing to lien. If we have a legal judgment against the people, and try every mechanism and simply cannot lien, then we may lose the money. The change in section 32 (Exhibit E) would be to protect the consumer and if something strange happens then we could not collect the tax.
A suggestion came from Washoe County regarding the numbering of the exemptions. It would be helpful if the bill drafters could keep the same numbers on the exemptions because people have them memorized.
Chairman McGinness:
If you look at the amendments that have been presented (Exhibit E and Exhibit F), there were changes on page 5, which was to talk about the hearing officer and to add 30 or 45 days for the commencement of the action, and we will ask the bill drafters to make it consistent. On page 6, we want to take out “and does not convey title” in section 21, subsection 2. On page 8 we are going to replace number 7 with the language in Exhibit F, and on page 11 we are going to add language meant to capture the real person who owed the tax in your scenario. We would like to have the amendment back for review to see exactly what it says so the committee is comfortable.
SENATOR RHOADS MOVED TO AMEND PER EXHIBIT E AND EXHIBIT F AND DO PASS AS AMENDED S.B. 238.
SENATOR O’CONNELL SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
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Chairman McGinness:
The final bill on the work session is S.B. 499
SENATE BILL 499: Revises name of parks marina development fund and expands permissible uses of money in that fund. (BDR 32-1316)
Chairman McGinness:
They want to be able to use the fund for any park that has water. They did need an amendment which would take out “state-owned wildlife management areas” from section 3, subsection 4, paragraph (a), because there are some federal facilities as well.
SENATOR RHOADS MOVED TO AMEND BY REMOVING THE LANGUAGE “STATE-OWNED WILDLIFE MANAGEMENT” AND DO PASS AS AMENDED S.B. 499.
SENATOR TOWNSEND SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
*****
Chairman McGinness:
I adjourn the meeting at 3:49 p.m.
RESPECTFULLY SUBMITTED:
Rochelle Trotts,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: