MINUTES OF THE meeting

of the

ASSEMBLY Committee on Taxation

 

Seventy-Second Session

April 24, 2003

 

 

The Committee on Taxationwas called to order at 1:30 p.m., on Thursday, April 24, 2003.  Chairman David Parks presided in Room 4100 of the Legislative Building, Carson City, Nevada.  Exhibit A is the Agenda.  Exhibit B is the Guest List.  All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

 

 

COMMITTEE MEMBERS PRESENT:

 

Mr. David Parks, Chairman

Mr. David Goldwater, Vice Chairman

Mr. Bernie Anderson

Mr. Morse Arberry Jr.

Mrs. Dawn Gibbons

Mr. Tom Grady

Mr. Josh Griffin

Mr. Lynn Hettrick

Mr. John Marvel

Ms. Kathy McClain

Mr. Harry Mortenson

Ms. Peggy Pierce

 

COMMITTEE MEMBERS ABSENT:

 

None

 

GUEST LEGISLATORS PRESENT:

 

Assemblywoman Sheila Leslie, Washoe County, District No. 27

Assemblyman Jason Geddes, Washoe County, District No. 24

Assemblyman Marcus Conklin, Clark County, District No. 37

Speaker Richard Perkins, Clark County, District No. 23

Assemblyman John Oceguera, Clark County, District No. 16

STAFF MEMBERS PRESENT:

 

Ted Zuend, Deputy Fiscal Analyst

June Rigsby, Committee Secretary

 

OTHERS PRESENT:

 

Mark Daigle, President/CEO, Colonial Bank, and member, Business Representatives Group

Ray Bacon, Nevada Manufacturers Association

Mary Lau, Executive Director, Retail Association of Nevada

Daryl Capurro, Managing Director, Nevada Motor Transport Association

Kara Kelley, President and CEO, Las Vegas Chamber of Commerce

Sam McMullen, Business Representatives Group

Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy In Nevada

Jeremy Aguero, Chairman, Technical Advisory Committee, Governor’s Task Force on Tax Policy in Nevada

Lisa Guzman, Citizen

Joe Edson, Field Organizer, Progressive Leadership Alliance of Nevada (PLAN)

Bob Fulkerson, State Director, Progressive Leadership Alliance of Nevada (PLAN)

Danny Thompson, Nevada AFL-CIO

Glen Arnodo, Culinary Workers Union

Danny Coyle, President, State of Nevada Employees Association, SNEA/AFSCME and Representative, Legislative Committee, Nevada Alliance for Retired Americans (NARA)

Noreen Nyikos, American Civil Liberties Union (ACLU)

Bonnie Parnell, League of Women Voters of Nevada

Paula Berkley, Reno Sparks Indian Colony

Brad Spires, Nevada Association of Realtors

Dennis Meservy, Nevada Society of CPAs, Taxation Special Interest Group

Michael Bosma, Nevada Society of CPAs, Taxation Special Interest Group

Lee Barrett, Las Vegas Realtor

Russ Fields, President, Nevada Mining Association

Michael Brown, Vice President, Public Affairs, Barrick Gold Corporation

Scott MacKenzie, State of Nevada Employees Association (SNEA), Local 404

George Flint, Chapels and Brothels

 

Chairman Parks called the meeting to order at 1:44 p.m.  The roll was called, and a quorum was declared.  He announced that testimony on the Services Tax proposal would be presented by a group called Nevadans for Real Tax Fairness.  Chairman Parks stated the Taxation Committee would be thoroughly reviewing all tax proposals during the coming weeks, especially the broad-based taxes.  Additional hearings would be scheduled in order to hear testimony on the liquor tax, cigarette tax, restricted slot tax, real estate transfer tax, and property tax.  The gross receipts tax proposal (GRT) would be scheduled after that hearing, and it could include discussion of a net profits tax. 

 

Mark Daigle, President and CEO of the Colonial Bank and a member of the Business Representatives Group (BRG), commenced testimony using a PowerPoint presentation.  A 43-page copy of the presentation (Exhibit C) was distributed to the Committee.  It was entitled, “Business and Taxes – A Tax on Services.” 

 

Mr. Daigle provided background highlights and stated that at the end of the 2001 Legislative Session, the business community had made a commitment to draft a proposal for funding needs of the state of Nevada.  They came together as the Business Representatives Group (BRG), held their first meeting on December 11, 2001, testified before the Task Force in July 2002, and issued their report of preliminary recommendations in December 2002.  

 

The process, according to Mr. Daigle, entailed approximately 12 meetings and involved more than 200 guests, who represented a broad spectrum of the business community.  Average attendance at each meeting was 40 businessmen.  Mr. Daigle characterized the meetings, lasting three to four hours, as having lively discussions and open sharing of ideas.  Representatives from trade associations, chambers of commerce, and a full spectrum of businesses participated in the meetings.  Every part of the private sector was represented within the BRG, according to Mr. Daigle.  The complete list of participants was submitted as Exhibit D.

 

Continuing, Mr. Daigle characterized himself as initially one of the most ardent opponents of a sales tax on services.  He recalled his earlier experiences in Florida where a similar proposal had been passed and repealed.  With the experience of the BRG, Mr. Daigle had changed his view on the services tax proposal. 

 

In the first meeting of the BRG, there was no disagreement about the need for Nevada to find funding sources.  Fundamental changes to the tax structure were required, and that included broad-based taxes as key components.  No tax option was overlooked in the thousands of hours of discussions.  Mr. Daigle emphasized there was no “perfect tax” identified by the BRG.  Their overall goal was to preserve the prosperity, economic growth, and diversification in Nevada.

 

Mr. Daigle summarized the key principles of the BRG, as listed on page 4 of Exhibit C.  No single industry would be targeted, and a broad-based tax was judged to be equitable.  There would be a focus on taxes paid by business, and that was the purpose of forming the Business Representatives Group (BRG).  The third key principle was an avoidance of “regressivity” in the proposed tax structure, as well as the reduction of existing regressivity in the tax codes.  The final principle was the recognition that successful geographic areas had diverse economies.  That diversity had to be reflected in the tax base, according to Mr. Daigle.  It was important to continue that diversification of the non-gaming aspects of the Nevada economy. 

 

Mr. Daigle summarized several essential points of a good tax policy (Exhibit C): it should reflect all elements of the economy, the taxes should be visible to the taxpayer, taxes should be voluntary whenever possible, there should be broad agreement by the Business Representatives Group (BRG), and the tax proposal should provide adequate funds for education.  Regarding educational accountability, Mr. Daigle commented that every member of the BRG was a Nevada taxpayer supporting the schools in the state.  He asked Ray Bacon to present the testimony on educational accountability.

 

Ray Bacon, representing the Nevada Manufacturers Association, commenced testimony in support of the services tax proposal (Exhibit C).  The BRG was fully aware of the new federal requirement, “No Child Left Behind Act (NCLB),” and the members realized it added a substantial undertaking to the process.  Mr. Bacon emphasized the accountability issue was foremost.  It involved changes to NRS Chapter 288.  There was always the perception that the Legislature adjourned each session thinking that sufficient money had been allocated for books and supplies; however, that needed to be addressed.

 

Continuing, Mr. Bacon stated there had to be prioritizing of educational spending.  Most were aware of shortages in the teaching field, especially in special education, mathematics, and science.  The solution, in his view, would be to address pay differentials for those subject areas.  Mr. Bacon added that to meet the NCLB criteria, it would be essential to close the gap in the at-risk schools.  It might involve special incentives to draw teachers to those assignments.  The at-risk children were not dumb, and, in many cases, they had not been given adequate opportunity to learn.  Technology advancements would enable enhanced teacher training and greater productivity.

 

In the area of educational accountability, Mr. Bacon remarked the school year was based upon an outmoded, agrarian society, and it was time to consider additional school days and instructional time.  The BRG also addressed enhanced compensation of teachers; however, it was an issue that would have to be postponed until 2005. 

 

Mr. Bacon reviewed the process utilized by the Business Representatives Group (BRG).  Originally, the revenue shortfall was estimated at $80 million per year.  In reality, it was $120 million when the BRG first organized, and it mushroomed to $359 million at the point of their final meeting.  As a moving target, it challenged the BRG to find the essential funding, and it created doubts on the spending programs, revenue projections, and government growth.  Mr. Bacon commented that, in the private sector, the solution to a moving target would be replacement of the CEO. 

 

During the process, the BRG examined more than 35 taxes, including the transaction tax on services, the gross receipts tax, payroll tax, property tax increases, business income tax, and a business license tax (BLT) increase.  Mr. Bacon stated there had not been unanimous agreement on any proposal; however, through a process of elimination and refinement, the BRG developed a workable list. 

 

From a tax policy standpoint, Mr. Bacon explained the issue for the BRG was to start by reducing the volatility of revenue from two sources: sales and use tax and gaming taxes.  The sales and use tax was dissected, and it was determined that, the more the base was expanded, the more stable the tax became.  The reinstatement of sales tax on food would stabilize the tax base greatly; however, the BRG did not make that recommendation.  Mr. Bacon remarked on the multitude of exceptions to the sales and use tax.  He emphasized that the reduction of exemptions and the expansion of the base both served to stabilize that tax.  The challenges to the gaming industry from competition were widely known.  Because that was an industry-specific tax, the BRG invested relatively little time on the gaming tax and never targeted the industry for a solution.

 

Continuing, Mr. Bacon described good tax policy as one that avoided sticker shock that, in turn, would create the unwanted effect of altering buyers’ spending habits.  It was more desirable to make a series of smaller changes in a multitude of taxes in order to expand the tax base.  The policy had to benefit multiple stakeholders, including business, government, and citizens.  From a business standpoint, it was critical to achieve stability.  Mr. Bacon referred to the Care-Amodei tax package and remarked that each section contained language that the tax would not be raised for the next ten years.  That statement sent a solid message to business.

 

In summary, the Business Representatives Group (BRG) supported multiple actions (Exhibit C).  The first was a transaction tax on services that focused on businesses and the affluent consumer.  The second recommendation involved the business license tax (BLT).  Mr. Bacon stated that the BLT was implemented in 1991, and it had not been adjusted for inflation.  The BRG was not opposed to changes on the BLT; however, in their view, the Governor’s number invited sticker shock.  The third area of support was related to the Secretary of State fees, where there were fees that had never been addressed.  The resident agents in Nevada had been included in the BRG, and they brought forth their own bill to address that issue.  Continuing with the list on page 12 of Exhibit C, Mr. Bacon cited the category of passive revenue measures, as described previously by Carole Vilardo.  He declared that category as a “no brainer.”  The matter of fiscally sound budget practices was judged to be essential to the BRG, and expenditure numbers were not as clearly defined as the BRG had expected.  It related directly to greater accountability and performance measurement efforts.  Despite some expected inefficiencies in government, there had to be a visible effort made to demonstrate appropriately, well-spent public dollars. 

 

Mary Lau, Executive Director, Retail Association of Nevada, continued with the PowerPoint demonstration (Exhibit C).  She commenced testimony on the A.C.R. 1 of the 17th Special Session] Task Force considerations, saying they were of great concern to the Business Representatives Group (BRG).  The A.C.R. 1 Task Force had requested the development of a broad-based tax structure that was reflective of the diversity of Nevada’s economy, one that was known to be a services and sales tax economy.  Ms. Lau stated the products economy had many exclusions and exemptions, whereas the service economy had not been fully examined.  The A.C.R. 1 considerations specifically identified those two areas as needing strict review.

 

In compiling the list of other taxes, such as gross receipts, mining, property, sales, service, and business profits, Ms. Lau explained the Task Force had been charged with the consideration of lowering the state’s sales and use taxes over time as new tax revenues became available.  It became apparent that the A.C.R. 1 Task Force, from the start, had been targeting services.  Continuing, Ms. Lau added that there had to be the consideration of ways to reduce budgetary reliance on volatile or cyclical revenue streams.  Businesses conducted as services were examined, and it was determined that those services were not cyclical.  Ms. Lau cited the example of a small business with five employees that outsourced its accounting and janitorial services. 

 

Reading from the slide (page 16 of Exhibit C), Ms. Lau summarized by stating, ”The A.C.R. 1 Task Force was charged to develop one or more definitive proposals to carry out the state’s need to provide additional revenue for state programs, to stabilize the tax base and to reduce the long-term structural deficit of the state budget.”  It was the opinion of the Task Force and the BRG that a tax on services accomplished the stated mission of A.C.R. 1.  It became the standard against which all tax proposals were compared.

 

Daryl Capurro, Managing Director, Nevada Motor Transport Association, commenced testimony as a member of the Business Representatives Group (BRG).  Mr. Capurro read from the PowerPoint slide (page 17 of Exhibit C) and stated, “The larger portion of the Nevada economy provides for the stability of revenue, breadth of tax base, the growth of tax base and tax revenue that matches the economy and the population, predictability of revenue, and insulation from Internet leakage.”  Continuing, Mr. Capurro stated the tax on services was designed to reduce pyramiding by exempting items for resale.  The tax had to meet the requirements of honesty and transparency, it had to be clearly stated on the bill, and it had to allow businesses to make informed purchasing choices with respect to the service they used. 

 

Continuing, Mr. Capurro stated the implementation of the services tax would be as early as January 1, 2004, since the collection infrastructure for sales and use taxes already existed.  The BRG recommended, in Washoe and Clark Counties, a 5 percent tax on all taxable goods and services in order to offset the reduction on the sales and use tax.  In the rural counties, the services tax would be set at only 4.25 percent.  

 

Moving to the next PowerPoint slide (page 20 of Exhibit C), Mr. Capurro described the exemptions to the services tax could include those goods that most households purchased.  The services sector in Nevada’s economy had been increasing at a tremendous rate, currently estimated at 60 percent of the economy.  That was contrasted to 40 percent for the product sector.  Approximately $56 billion dollars would be the service tax base before any exclusions or exemptions.  Currently, there were $37 billion in sales tax on the products base (page 20 of Exhibit C).  Mr. Capurro remarked that hundreds of millions of dollars of new tax revenue could be provided by implementing the 5 percent tax on selected services and by reducing the sales and use tax on products to 5 percent.  A use tax on services from out-of-state vendors was also part of the recommendation. 

 

Combining the implementation of the new 5 percent service tax with the reduction in sales tax to 5 percent on products would generate, according to Mr. Capurro, $400 million to $500 million in new revenues annually.  That would provide benefits to the education system, as well as tax relief from the product sales tax for citizens and businesses.  Mr. Capurro termed it an “economic stimulus” that would attract business.  The proposed rate would be lower than most of the surrounding states, with the exception of Idaho, and would provide an incentive for purchase of goods, capital investment, and location of businesses in Nevada. 

 

In conclusion, Mr. Capurro offered an example from his industry that would highlight the advantages of the services tax.  When interstate members of his motor transport business purchased equipment, the bids for rolling stock or equipment were the same whether the equipment was delivered to Nevada or Utah.  If the bids were the same, then the single prominent issue was the sales tax rate.  When placing an order for $10 million worth of equipment, a 1 percent difference in the sales tax in Nevada precipitated a significant amount of taxable revenue to the state.  By law, if Mr. Capurro’s business was based in Nevada or Utah, and he had operations in various states, he could purchase that equipment for delivery into Utah where there was a lower sales and use tax.  After six months of use, that equipment could be moved to the Nevada site without any additional taxation.  The sales tax had been paid to another state, and they were operating within the law.

 

Mr. Capurro stated it would make more sense and create more business for Nevada if those purchases were made in Nevada and put into service in Nevada, without having to “go through the hoops” to wait six months.  It would be especially relevant with big-ticket items, for example, automobiles and rolling stock in the motor transport industry.  Mr. Capurro concluded his testimony and introduced the next witness.    

 

Kara Kelley, President and CEO of the Las Vegas Chamber of Commerce, commenced testimony and explained a goal of the Business Representatives Group (BRG) had been to discover a way to support a broad-based tax in which all businesses participated.  Additionally, it was important to design that tax so that it was businesses and wealthier individuals who were actually being the consumers of the tax.  Ms. Kelley did not view the services tax as regressive, since it was designed to lower the burdens on families in Nevada. 

 

Continuing with the logic of the service tax, Ms. Kelley explained that businesses were major users and purchasers of outside services.  That met the test of a “broad-based business tax,” since every business would utilize some services at some point.  In her view, it was a tax that businesses would pay, and she encouraged the Committee to take notice of the opponents scheduled to testify later in the hearing.

 

In terms of what to tax in the services area, Ms. Kelley described those decisions as policy issues.  She noted that the Chamber’s Board was not exempt from the list, and 70 percent of their board member industries would be taxed under the proposal.  Ms. Kelley acknowledged the policy decisions on what would be taxed would reside with the Taxation Committee.  If there were issues about taxing their constituents, it would be recommended that exemptions be considered. 

 

Throughout the process, the Business Representatives Group (BRG) viewed businesses as consumers of services, according to Ms. Kelley.  Reading from a list on page 24 of Exhibit C, the witness gave examples of those services, which included accounting, auditing, book printing, janitorial, landscape maintenance, and lobbying.  On page 25 of Exhibit C was a list of taxable services primarily consumed by businesses, for example, stenographic services and vault services.  A list of services used by the affluent resident was on page 26 of Exhibit C.  Those services included accounting, non-commercial air transportation, and country club memberships.

 

Ms. Kelley admitted there had been the argument that average Nevadans occasionally used legal services.  She defended the inclusion of that service based on the fact that legal services were primarily used by businesses.  Continuing with Exhibit C, Ms. Kelley addressed the category of taxable discretionary services.  Examples included adult cabarets and brothels. 

 

In order to avoid double taxation, items and industries were exempted if they were already subject to taxation.  Services covered by NRS Chapters 372 and 374 would also be exempt.  For the scenario where all services would be taxable (page 37 of Exhibit C), Ms. Kelley estimated the total savings per household at $90; however, with service tax exemptions (page 37 of Exhibit C), the average household would save an average of $250 per year.  Ms. Kelley introduced the next witness, Sam McMullen, representing the Business Representatives Group (BRG).

 

Assemblyman Goldwater requested clarification of the term “average Nevadan.”  Mr. McMullen offered to answer and stated the term “average household expenditures” was borrowed from Mr. Jeremy Aguero on behalf of the A.C.R. 1 Task Force.  Those figures were extrapolated from national data and reflected an attempt to capture the appropriate expenditures for an average income Nevada household. 

 

Mr. McMullen recalled the commitment made during the final days of the 2001 Legislative Session.  There had been good follow-through on that promise, and a plan had been produced that first focused on business-only taxes and, secondarily, targeted other sources for purposes of filling gaps.  Businesses had promised in 2001 to propose a plan in which they would be encumbered for the largest share of the tax burden.  Quoting Mr. Aguero, Mr. McMullen stated, “Along the basic lines of the exemptions we proposed, which focused the service taxes to be paid on businesses and those who are wealthy, 75 percent of those services taxes would be paid by business.”  The remainder would be paid by individuals, especially the affluent person. 

 

Continuing, Mr. McMullen reiterated the BRG’s effort to think long term and develop tax policy that would mirror the economy and grow with it.  Critics would argue that a transaction-based tax system was not good; however, Mr. McMullen defended the services tax as consumption-based and related to the number of people.  The tax engine should not require a return to the 2005 Legislative Session. 

 

Returning to the slide presentation (page 37 of Exhibit C), Mr. McMullen reiterated the intent had been to focus on businesses and on those who could most afford to pay.  The goal was to generate more revenue than was required to balance the budget, and to increase the business interest in the education system.  There was a clear need to drive revenue into the current biennium.  Most other taxes had the disadvantage of a delay until 2005 before revenues were generated.  Mr. McMullen noted it was important to broaden the transaction base, specifically by taking one of the more regressive taxes, the sales tax on products, and make it less regressive.  He emphasized that drove the structuring of the service tax proposal.

 

Continuing, Mr. McMullen explained that currently there was 6.5 percent of state-imposed sales tax (page 39 of Exhibit C).  It was comprised of three components: the 2 percent sales tax share to the state, a 2.25 percent combined basic and supplemental city/county relief tax, plus the 2.25 percent of local school support tax (LSST).  The state’s 2 percent sales tax share had been voted in by the public, and that amount could not be reduced.  The 2.25 percent that funded municipal government operations was fundamentally bonded and could not be reduced.  The final category, the local school support tax (LSST) of 2.25 percent, was studied as a way to maximize the reduction to 4.25 percent, at least on the state-imposed rate.  If the local options were added in the counties where applicable, it would be a 5 percent service tax rate.  In other counties, it would be a 4.25 percent rate. 

 

Mr. McMullen addressed what appeared to be the reduction of the local school support funding, and he stated that was not the intention of the Business Representatives Group.  The process would be to regenerate the local school support tax as the first increment of the service tax.  An additional mechanism was expected that would define that portion as local school funding, a credit against the Distributive School Account (DSA). 

 

Mr. McMullen admitted there had been legal questions about whether or not it was feasible, and he assured the Committee it could be done.  The plan would not require a vote of the people to extend the sales and use tax.  A separate tax would be created that only taxed services and not goods.  It could be enacted by the 2003 Legislature.  Mr. McMullen emphasized the tax relief had to be concurrent with the imposition of the services tax. 

 

Mr. McMullen called the Committee’s attention to page 41 of Exhibit C, which outlined a time line for implementation of the proposed service tax by January 1, 2004.  The figures presented were based upon a 5 percent services tax, and he acknowledged it was within the authority of the Taxation Committee to select another tax rate.  Concurrent with the imposition of the service tax would be an immediate reduction in the local school support tax by lowering the sales tax on products by 1 percent.  There would be an immediate 13.8 percent reduction in the total sales tax rate.  With that 5 percent service tax rate, approximately $600 million would be generated over six months.  That compared with only $180 million credit against it, as outlined on page 42 of Exhibit C.  That would leave more than $400 million in new, available tax revenues for distribution as determined by the Legislature. 

 

Continuing, Mr. McMullen explained that after six months of revenue production (January 1 to July 1, 2004), the Board of Examiners would review the revenue and certify that the numbers met the levels specified in statute.  A determination would be made whether that triggered additional reductions in the sales tax on products.  That reduction would be implemented on a date specified by the Department of Taxation.  There were cushions in each of the figures (page 42 of Exhibit C), and there was no jeopardy to the fiscal projections.  Mr. McMullen noted that, if reductions were judged to be appropriate, they would happen in the second fiscal year.  The expected revenue from the 0.25 percent sales tax on products was $90 million annually.  If another trigger point was reached and revenues exceeded projections, there would be another reduction by one-quarter.  Mr. McMullen reiterated the intent had been to maximize the reduction in the sales tax on products.

 

Returning to the PowerPoint presentation (page 42 of Exhibit C), Mr. McMullen clarified the time period was actually the second half of the first year of the biennium, not the first half.  Continuing, he explained the proposed tax would be giving up $30 billion of a service base of $55.6 billion worth of transactions; it would ensure that it was non-regressive.  Approximately $25 billion remained as taxable transactions.  In one-half of one year, that would generate more than $600 million (page 42 of Exhibit C).  It would be reduced by $180,000 to replace the 1 percent reduction in the sales tax starting on January 1, 2004.  In the first biennial year, it would leave available tax revenues of approximately $400 million.

 

Calling the Committee’s attention to the next slide (page 43 of Exhibit C), Mr. McMullen stated the slide displayed a full year of implementation.  The 5 percent tax on services during the second year of the biennium would raise $1.25 billion.  After subtracting the local school support tax (LSST) replacement amount of $740 million, the available new tax revenue would be $485 million. 

 

In conclusion, Mr. McMullen emphasized two points.  The first was that by adding those figures together, it equated to the full budget shortfall for the next biennium.  Secondly, those figures did not include the business license tax, the passive revenue generators, the Secretary of State fees, and others that would add to the total. 

 

Chairman Parks commented there had been considerable testimony from the A.C.R. 1 Task Force, and he asked if the services tax proposal had been presented to the A.C.R. 1 Task Force.  Mr. McMullen stated, “Not in this detail.”  The final recommendations had been completed in recent months.  He acknowledged the foundation of information that was built by the Task Force and the Technical Advisory Group had enabled the Business Representatives Group (BRG) to move forward.  Initial data had indicated a reduction in sales tax was feasible; however, the BRG felt it would be prudent to wait until all of the figures could be confirmed.  In reality, projections from the services tax proposal far exceeded their expectations.  The basic concept had been first proposed in July, and the intent had been to interact with the Task Force; however, that never happened.  The BRG did not complete its final report until after the A.C.R. 1 Task Force issued its report.  Mr. McMullen stated the charter of the BRG was larger than that of the Task Force, and his group was able to look at a total solution.

 

Assemblyman Anderson requested clarification on the shifting of dollars from the local school support tax (LSST) to a state-funded revenue source.  He voiced concern over that situation and asked, if the LSST was taken away at the local level and moved to the state level, would the offsetting increase in funding be determined by the student population of the entire state or by the individual school district.  How would that be equitable?

 

In response, Mr. McMullen reiterated how the LSST worked.  The theory was that, given the vagaries of some change between service transactions and product sales, the system would be county-based.  Services sold in that county would be attributed to that county, and it would be akin to the current sales tax system.  Additionally, the BRG recommended there should be a defined account or a mechanism, similar to the LSST, that kept the funds at the local level.  

 

Assemblyman Anderson summarized by saying the LSST would be removed from the local schools, and it would be replaced with a services tax in that county.  He did not view that as a revenue increase; rather, it was a “push.”  Mr. McMullen concurred.  Continuing, Assemblyman Anderson concluded there was no dollar advantage to the school district with that scenario, nor would there be predictability of dollars. 

 

In response, Mr. McMullen explained it was designed to have neither an advantage nor a disadvantage to the school district, unless a policy decision was made to give them more dollars.  From a standpoint of predictability, there were opinions at the local government level that, given the erosion of sales tax, there might be even greater stability and reliability from a services tax than there would be from a sales tax.

 

Returning to the issue of the proposed loss of local school support tax (LSST) dollars, Assemblyman Anderson voiced his concern over the delicate balance, as it currently existed.  The state had an obligation to make up any dollar shortfall at the local level, regardless of geographic area.  He failed to see the dollar advantage in that scenario.  He asked if it was merely a shift for the state’s obligation.  Mr. McMullen replied in the affirmative.  Assemblyman Anderson concluded there was no new source of revenue generator.  It was merely a matter of “taking one group off the hook and putting someone in its place.”  In response, Mr. McMullen stated the proposal would clearly collect taxes from some people and would reduce taxes for others.

 

Reflecting on the testimony, Assemblyman Hettrick recalled hearing that the transaction tax generated approximately $485 million dollars over and above the replacement of the LSST.  Although it generated more money, the distribution of that surplus had not been determined.  If the Legislature chose to spend that additional money beyond the LSST replacement, it could be directed to education.  The actual generation of dollars appeared to be significantly greater and, with the exemptions, it would shift the tax burden to more businesses and away from individuals.  Assemblyman Hettrick asked for confirmation of the figure of $485 million dollars in surplus.  Mr. McMullen confirmed that statement.  Chairman Parks interjected that the dollars were “unmarked funds.”

 

Assemblyman Hettrick explained the LSST was 2.25 percent, and it was based upon the sales within a county.  Every other component of that sales tax, displayed in the PowerPoint presentation, was a percentage based upon sales in that county.  In Assemblyman Hettrick’s words, “If a county lowered the taxes, and one component of the remainder was 2 percent, that would be the same 2 percent generated in that county, because the source was that county.  By multiplying that number by the appropriate percentage, it would determine the number equivalent to 2.25 percent and replace it with the new money from the sales tax on services.  It would be an exact replacement of that county’s revenue with no loss whatsoever from a bigger tax base, the sales tax on services.  It leaves over the $485 million dollars after you do that calculation.  There is no loss whatsoever to the LSST dollar anywhere within this proposal.  It goes county by county exactly as it is done right now.” 

 

Mr. McMullen stated there had been anticipation there would be additional funds going to education.  The issue of funding education was a function of allocating more money to each of the counties. 

 

Assemblyman Goldwater asked Mr. McMullen if he envisioned the same administrative structure with a 1.25 percent allowance within the sales tax on services.  Would collectors of the tax be compensated for their efforts?  Mr. McMullen admitted his group had not made that determination; however, he viewed that as the decision of the Taxation Committee.  Assemblyman Goldwater voiced some concern that such a recommendation was not outlined.  Mr. McMullen speculated that language would be forthcoming, but a collection allowance had not been included in their formal proposal.  

 

Assemblyman Goldwater voiced great concern over the “use” portion of the “sales and use tax,” especially in regard to the “use of services not from Nevada vendors.”  As such, the use tax would be levied against the little guy that used some out-of-state service, and now he would be required to file a “use tax” return.  In response, Mr. McMullen clarified that, under their proposal, the little guy would not be affected.  Every business would have either a sales registration number or a service business registration number that would likely increase the use tax compliance on existing sales tax.  Secondly, it would require those people to file a use tax return on products purchased from out of state, as well as a use tax on the purchase of an out-of-state service that was actually performed in Nevada.

 

Assemblyman Goldwater cited the example of a dry cleaning business that employed four people, but hired an accountant in California.  He asked Mr. McMullen if that business would be required to file a use tax return.  Mr. McMullen replied in the affirmative and stated it was because the services were consumed in Nevada.  Assemblyman Goldwater emphasized that was a very major concern for him.  There was a plethora of services provided through interstate vendors, and now Nevada citizens would be asked to file thousands of tax returns to comply with the new law.

 

In defense of the proposal, Mr. McMullen stated the law would serve as an encouragement to Nevada citizens to use Nevada services and vendors.  In that case, no tax return would be required. 

 

Assemblyman Goldwater requested clarification of how services were valued, for example banking transactions.  Would a mortgage payment be considered a service?  Mr. McMullen replied it would not fit the definition.  A service had to have a specified amount charged for that service, and there would be no attempt to impute the value of services.  In response to Assemblyman Goldwater, Mr. McMullen declared a bank would be a purchaser of services.  With skepticism, Assemblyman Goldwater interjected, “And they would all be using a Nevada business.”  Mr. McMullen explained, if the bank did not utilize a Nevada business, the bank would be required to file a use tax return on those purchases of services.  He believed it would level the playing field for in-state and out-of-state purchases.

 

On the issue of policing the filing of use tax returns, Assemblyman Goldwater commented it was already a difficult task to track the sales of tangible goods.  He asked if the Department of Taxation would require additional resources to police the new tax.  In response, Mr. McMullen remarked it would be the same system as was currently used for tracking sales tax.  Assemblyman Goldwater commented on the existing requirement of “substantial physical presence” and asked if the same nexus standards would apply.  If that was the case, Assemblyman Goldwater concluded the witness’s last comment was not accurate.  No tax return would be required.

 

Mr. McMullen explained if a national auditing firm provided audit services and actually had employees physically located in Nevada, those services should be taxed as in-state services.  He acknowledged there was a Supreme Court opinion that had complicated the issue of sales tax on products, and everybody had to live with that situation.  Mr. McMullen stated his group’s intention was to maximize fairness and to ensure there was no incentive to purchase out-of-state services. 

 

Assemblyman Goldwater offered a hypothetical situation and stated, “Every Nevadan would be subject to audit from the State Department of Taxation based on his potential consumption of services and whether or not he has received a service.”  Mr. McMullen countered with a question and asked “If they were subject to that for the sales tax on products, why would it be any different?”  Assemblyman Goldwater replied, “It was a lot different [because] it was tangible goods.” 

 

Assemblyman Griffin questioned the credibility of the numbers in terms of the $704 million deficit, and he asked Mr. McMullen if he still doubted those figures.  Mr. Bacon agreed the deficit estimate had become more certain; however, the additional spending numbers were fluctuating, and there continued to be challenges to the figure of $704 million.  There were specific questions on how Medicaid was counted, because that funding estimate was based upon the period after September 11, 2001.  There was some suspicion that the actual numbers had grown.  Mr. Bacon commented he was not in a position to declare, with certainty, that the $704 million figure was accurate.

 

Assemblyman Griffin remarked the testimony indicated there would be a $950 million tax increase over the biennium, and he wanted to reconcile that figure with the estimated deficit of $704 million, that was considered doubtful by Mr. McMullen.  Mr. McMullen admitted that the numbers were estimates until the budget was finalized.  His group attempted to adapt to that number as it expanded through the months of additional definition.  Secondly, they tried to keep a layer of additional funds on top of that.  He admitted it was an unusual exercise for the Business Representatives Group (BRG) to attempt to do projections of revenues and expenses for the state of Nevada.  Mr. McMullen added that the BRG reacted to a variety of projections, including $1.2 billion over the biennium.  He emphasized there was no recommendation from the BRG that money had to be spent just because it was proposed.  The alternatives were to adjust the revenue numbers downward or to find places in the tax system that could use refinement to make the tax less regressive.  Those would be policy decisions for the Legislature.  Mr. McMullen reiterated the goal had been to suggest ways to provide significant capacity, as well as an “engine” that would handle the problem on a long-term basis.  The business community would provide the majority of the support under their proposal.

 

Assemblyman Griffin cited remarks in Mr. McMullen’s opening statement where it was suggested that the advantage of the services tax was that it would be “voluntary.”  He questioned whether consumption of services actually was “voluntary.”  Assemblyman Griffin also questioned the validity of the testimony that the services tax was not volatile or cyclical.  In his view, if the economy was cyclical and services were voluntarily consumed, then tax revenues would have to be cyclical as well.  He requested clarification on, what appeared to be, competing concepts.

 

Mr. McMullen agreed those were clearly competing ideas.  The BRG was influenced by the concept of “voluntary consumption of services,” but the real issue was that there were multiple ways to tax people and businesses.  Some were up-front methods, and some were not.  Mr. McMullen remarked that a consumption-based tax system was, in many ways, a more honest system.  If a service or a product was consumed, a tax was expected.  It was transparent and out in the open.  Secondly, there were some purchases that were not as “voluntary” as others.  That raised the issue of regressivity, and the BRG’s definition of that was, “a necessity that had to be purchased by those who could least afford it.”  Mr. McMullen was hopeful that the Taxation Committee would find a way to reduce the regressivity of certain expenditures that were less than voluntary.  He admitted the proposal would raise a significant amount of taxes in Nevada, and he hoped that the burden would be spread out as fairly as possible.

 

Mr. McMullen offered to address the issue of tax stability.  The Business Representatives Group (BRG) did not have sufficient business data available to them during their meetings.  Many businesses felt the services side of their business expenditures was more stable than the labor side or the product side.  There had been agreement that moving the tax emphasis to transactions and services would add to their business consistency.  Mr. McMullen emphasized that the BRG would never assert that a tax was insulated from fluctuation. 

 

Assemblyman Griffin questioned the issue of “pyramiding.”  He recalled receiving a letter from Guy Hobbs that had indicated the sales tax on services would have a “pyramiding effect.”  Because business consumed services that often involved multiple layers, pyramiding appeared to be inevitable.  Mr. McMullen called attention to the list of exemptions (page 11 of Exhibit E) that showed a wide variety of non-taxable services.  The manufacturing side of business was not included in the numbers of service-based transactions.  Examples included construction and agricultural services.  The list was comprised of those services that might stack and pyramid, causing multiple additions to the price.  The BRG believed there was sufficient revenue capacity to exempt the services on the list (Exhibit E). 

 

Assemblywoman McClain requested clarification of the local school support tax (LSST), and she asked if the proposed revenues would all be deposited into the General Fund.  The LSST was dedicated money.  She asked why the state’s regular share of revenues was not factored into the model as General Fund money.  It would not jeopardize the LSST in future legislative sessions.  Mr. McMullen replied there was no intention to jeopardize education funding.  Secondly, the state’s 2 percent share of the sales tax was immune to change.  It could not be reduced or redirected to another category without a vote of the people.  The BRG considered it to be untouchable.

 

Assemblywoman McClain commented, “You are telling me the LSST can be.”  Mr. McMullen responded the BRG was looking for the part of the sales tax rate that could be reduced.  There were two of the three components that were untouchable, and the LSST was the exception; however, he hoped it did not cause concern, because it could be immediately regenerated as the first part of the proposed services tax.  It would be allocated into funds similar to the LSST, segregated into local shares, and credited against the Distributive School Account (DSA) on the per-pupil guarantee. 

 

Assemblyman Mortenson raised the issue of business regressivity.  As he understood the testimony, the tax was not intended to be regressive to small businesses, due to the fact small business would pay less than big business; however, there was a problem in that large businesses would integrate services into their corporate structure.  A large company would hire its own lawyers, accountants, and security personnel.  Assemblyman Mortenson asked if that kind of company would pay a tax on services, in contrast to a small company that had contracted its services from the outside. 

 

Kara Kelley, representing the Las Vegas Chamber of Commerce, clarified that the tax on services would not “eliminate” regressivity, and the goal of the BRG had been to minimize regressivity.  Ms. Kelley explained there was a visible shift in business trends to rely on outsourcing for services.  Many large businesses that were significant consumers of services reported that a 5 percent sales tax on services would not create an incentive to bring those services in-house.  There might be some businesses that would shift to in-house services, and, on the positive side, that would have the desirable effect of creating new jobs.  Ms. Kelley explained that small businesses had less need for the wide variety of services, and that would eliminate some of the regressivity for that category.

 

Assemblyman Mortenson remarked that casinos had their own security personnel, accountants, and janitors.  As such, services were vertically integrated into the corporate structure, and the casinos would pay a smaller percentage of the tax on services, compared to a small business.  Mr. Bacon clarified the issue by citing an example of the legal department of a large corporation.  Legal departments were good indicators [of trends] because they handled project management and multiple legal actions.  Given that burden, those corporations often outsourced their legal work to specialty law firms.  Mr. Bacon concluded that, although there was an internal legal department, prosecution of cases was often handled on an outsourcing basis.  He stated there would be significant expenditures on outsourced legal and accounting services in the largest corporations.

 

Assemblyman Mortenson asked Mr. McMullen if, in the BRG’s projections of the services tax, they had compared the percentage the citizen would pay with the percentage a business would pay.  He had heard, “53-47.”  Mr. McMullen stated the latest figures from Jeremy Aguero indicated that, based on the proposed exemptions, the business component of the services tax paid would be 75 percent.  The remaining 25 percent of the tax burden would be paid by individuals, and it would include those who would be most capable of paying the tax, given the voluntary nature of service purchases.  Referring to the 53 percent figure, Mr. McMullen clarified it was a number presented by Mr. Aguero.  If no exemptions were provided on the services tax, businesses would purchase 53 percent of the services and, therefore, would pay 53 percent of the services taxes.  Mr. McMullen added that the BRG had compacted the services tax package in an attempt to focus on the anti-regressive side of the package.  He was pleased that their effort resulted in pushing the tax burden on businesses to 75 percent.

 

Assemblywoman Pierce called attention to the list of services (Exhibit C, pages 24-27) and declared most appeared to be in-house functions for the biggest businesses.  She voiced great concern for the small business owner, and she stated the proposal clearly and ultimately placed the burden on small business.  She emphasized it would not have an impact on the big retailers or the big banks.  Assemblywoman Pierce found the prioritization to be confusing, and she feared the effect on small business. 

 

In response, Mr. McMullen stated the Committee on Taxation would be faced with the same decision that was faced by the Business Representatives Group (BRG).  The BRG decided that every business had to share the burden in support of Nevada.  Additionally, their evidence indicated that big business did not avoid payment of the services tax; rather, the opposite appeared to be true.  Mr. McMullen cited the example of a retail grocery store in Reno, Nevada, that purchased $4 million worth of services every year.  That store would not see a reduction in their sales tax because their grocery items had no sales tax; however, that grocery store paid almost $900,000 in janitorial services.  A wide variety of big businesses would continue to purchase services. 

 

Continuing, Mr. McMullen cited the estimates on the banking industry, and he stated, “The service hit on banking, in general, would be 50 percent or more of the existing taxes that they pay.  Those, of course, would all go to the state.  That would take place before they take the financial institutions off budget, as has been proposed, or the business license tax or the Secretary of State fees or any of the other business fees.”  Mr. McMullen acknowledged the assumption posed by Assemblywoman Pierce; however, the BRG did not regard the services tax proposal as a light tax on big business.  It would be a serious hit to big business, as well as a fair hit.  If a business did not purchase services, it could be assumed that jobs were being created internally.  That action had great economic value to the state. 

 

Assemblyman Goldwater, on the subject of the “use” portion of the sales and use tax (SUT), stated, “I do not agree that you would not take a $4 million tax bill that you would have had and bring those services in-house, if you are a big business.  A small business cannot export that tax.”  Assemblyman Goldwater also voiced disagreement with the notion of having to rely on use tax returns being filed to meet the projected numbers.  He posed a hypothetical situation and asked Mr. McMullen to explain the tax transaction.  The example was a multi-national bank, legally a Delaware corporation that derived the bulk of its business in Nevada.  The bank hired a Delaware accounting firm, scheduled meetings in New York, and assembled for their annual meeting in Hawaii.  For purposes of an example, the total cost of the accounting bill was $1 million.  He asked how Nevada would collect their services tax on the accounting services used by that big business. 

 

Mr. McMullen replied there were two ways to do that.  The first would be an apportionment mechanism similar to what was used in other taxes.  Assemblyman Goldwater interjected and asked, “Tell me how you value the preparation of the balance sheet for Nevada’s portion of the services consumed?”  Mr. McMullen countered that he viewed it as actual services that happened within the state of Nevada.

 

Continuing, Assemblyman Goldwater asked, if the bank operated in 50 states,  would you divide the bill for accounting services by 50.  Mr. McMullen clarified it would be apportioned in various ways.  If the bank did business in all 50 states, then some would be allocated to the state of Nevada.  In response to Assemblyman Goldwater’s question on “how much,” Mr. McMullen stated it would be similar to any other apportionment system.  Assemblyman Goldwater countered that the other apportionments were the value of a product or the amount of revenue derived from a particular state, and those were easy to do for other types of transactions taxes.  In contrast, when it was a service tax, Assemblyman Goldwater stated he failed to understand the logic.  Mr. McMullen voiced confidence that there would be a fair method to do the tax assessment.

 

Assemblyman Goldwater reiterated his doubts and recalled Mr. McMullen’s testimony during the last legislative session.  There had been a promise from Mr. McMullen to deliver a broad-based business tax for all businesses, and Assemblyman Goldwater was not confident the promise had been fulfilled.  There appeared to be too many unanswered questions.  When he was the Chairman of the Taxation Committee, Assemblyman Goldwater called it the “non-taxation committee.” 

 

Assemblyman Goldwater reiterated his doubts that big business would pay the tax in their consumption of professional services.  Additionally, there appeared to be no clear methods developed for valuing and apportioning those services.  There appeared to be no clear definition of a business nexus, especially when the service did not occur in Nevada.  Questions remained on how to tax a company that was not incorporated in Nevada.  Assemblyman Goldwater voiced disappointment at the lack of answers; however, he acknowledged that his dry cleaner would pay the tax.  Mr. McMullen responded that Assemblyman Goldwater would not have to pay on his dry cleaning.  He added that the numbers from Jeremy Aguero were based on purchases only in the state of Nevada, and out-of-state purchases would be included in the economic numbers for another state.

 

Assemblyman Goldwater countered, “Purchases of tangible goods were simple.  Purchases of services were tough.”  Mr. McMullen explained that the model used for their projections was the economic census performed every five years.  That census considered all transactions that occurred in every state in every year.  For the BRG report, the numbers were modeled through Jeremy Aguero for purposes of demonstrating that the goods side [of purchases] was $37 billion, and the services side [of purchases] was $55.6 billion.

 

Continuing, Mr. McMullen explained his point was, services that were purchased under an economic model in another state were not included in their numbers.  That had been an issue that the BRG viewed in terms of erosion, leakage, or enforcement, and it did not reduce the impact of the numbers as presented. 

 

Assemblyman Goldwater asked Mr. McMullen if the insurance industry had been exempted.  Mr. McMullen stated that, currently, there had been a presumption made for a company that was already paying a tax.  Assemblyman Goldwater interjected and asked if the plan considered the fact that the in-state insurance industry already received a very large rebate from Nevada’s Home Office Tax Credit.  He asked if that would amount to a “double exemption.”  Mr. McMullen replied, “You just put a broad exemption in there for insurance.  If you want to tune it for in-state and out-of-state operations, that would be a smart thing to do.”

 

Chairman Parks requested clarification on testimony regarding proposals for particular services and the requirement that an in-state company would have to calculate the added 5 percent for a service tax.  An out-of-state company would not have that obligation since the service would be performed in that state.  Chairman Parks asked if it would force companies to look across the Nevada border to seek services from out-of-state companies. 

 

Mr. McMullen agreed and stated,  “You would be if there was no use tax provision in that it was similar to the sales tax on products.”  If the activity was performed for the good of a company in the state of Nevada, then that business had an obligation to admit that the business paid for a value in services of some dollar amount.  The company would have to claim that as it currently claimed the value of a tangible good that it brought into the state for use here.  There was no increased difficulty in dealing with services than in dealing with the goods side of a business.  Mr. McMullen reiterated that the BRG was not able to define every possible answer.  The bottom-line was those problems had been addressed and accommodated in other systems. 

 

Assemblyman Grady had two questions as follow-up to Assemblyman Goldwater’s concerns.  The first question regarded the cost of collection and implementation.  The Department of Taxation had previously testified there was a lack of personnel to perform audits on the sales tax side.  He asked what the BRG had envisioned as the cost estimates to compensate for the collection of adding a services tax to the sales tax. 

 

In response, Mr. McMullen stated there had been a lot of debate on the cost estimates for implementation.  The BRG was guided by the fact it was an addition to an existing tax, and, therefore, would be merely an extension of a collection process that was in place.  The case law and regulations existed.  Secondly, the BRG was encouraged by the estimates because they were projected to produce $1.25 billion in new revenue.  As such, it was viewed as a very efficient system.  If viewed in terms of revenue per personnel, the addition of 120 new personnel for $10 billion was better than adding 60 personnel for only $220 million. 

 

Quoting Mr. Chinnock of the Department of Taxation, Mr. McMullen referred to the audit standards and personnel ratios based on what was currently used for sales and use tax [collection].  Most of the BRG members recognized that there were difficulties in sales and use tax audits, because services had to be separated out from the product side.  Auditing was difficult because it was often necessary to determine if a business had pushed items across the line from one category to the other.  As a result, that audit ratio might not apply if all transactions were taxed the same.  It would not be of concern if transactions were moved across the line from the sale of a  product to the sale of a service. 

 

From the business side, Mr. McMullen stated there was understanding about compliance, and many businesses were already part of the [tax collection] system, were already under an audit cycle, and were being evaluated under current practices.  Selling a service would be considered a natural extension.  In his business, Mr. McMullen admitted he would have to learn that process; however, he had been filing sales and use tax documents for many years, and they were not that difficult.  Implementation seemed fairly straightforward from the standpoint of the BRG.

 

Assemblyman Grady requested the return of Mr. Daigle to the witness table.  He asked Mr. Daigle, as a banker, how he envisioned the banking industry in the scheme of the proposal.  It appeared to Assemblyman Grady that banking would be taxed for services, and he asked Mr. Daigle to comment.

 

Mark Daigle, representing Colonial Bank, responded that banks were large users of services and would be both a tax collector on services that were taxed, as well as a taxpayer for those services that the bank consumed.  He called attention to page 24 of Exhibit C that contained a list of taxable services primarily consumed by business.  Mr. Daigle remarked that there were only 2 of approximately 20 services on page 24 that his bank did not consume.  His bank used extensive accounting, auditing, and bookkeeping services, among many others.  He estimated that his bank used 50 percent of the services on page 25 (Exhibit C), and all of those services were outsourced.

 

In terms of a “use tax basis,” Mr. Daigle disagreed that a dry cleaner with four employees would hire a California accountant.  He added that his personal business did employ a California computer company and paid them hundreds of thousands of dollars per year.  Mr. Daigle stated he would be happy to pay, under a use-tax scenario, the tax on the utilization and consumption of those services.  In terms of addressing the accounting services for banks, his bank, Colonial Bank, was headquartered in Montgomery, Alabama; however, he was billed for legal services used within the state of Nevada regardless of whether they were provided by a Nevada company or not.  He possessed the financial records to be able to complete and identify the use tax on that service. 

 

Continuing, Mr. Daigle stated his bank was charged for auditing services for external accountants who were based in Montgomery, Alabama.  He reiterated he was billed for consumption of services from third-party providers, and he was able to identify them and was willing to pay a use tax on that basis.

 

Assemblyman Grady asked if the situation described by Mr. Daigle would be considered a “norm” for all banks.  Mr. Daigle replied in the affirmative.  Every bank was an audited institution and, under audit procedures, there would be a requirement to appropriate the services consumed by that division within that audited entity.  That would be true whether or not it was a non-Nevada chartered financial institution, many of which filed in the Nevada-based report with the Federal Deposit Insurance Corporation (FDIC).  All of that information was tracked online from the FDIC Web site.  In the case of Colonial Bank, internal financial statements that were used within the audit process would identify those expenditures that were appropriated to the state of Nevada.

 

Assemblyman Goldwater requested clarification if Mr. Daigle was considering submitting a use tax report on his bank’s own internal audit performance.  Mr. Daigle responded, “No,” and he explained that for the external CPA firm . . . Assemblyman Goldwater interrupted and stated, “External?  I thought you said internal.”  Mr. Daigle clarified he meant “internal allocations” of that information, and it was reportable.  Assemblyman Goldwater asked who performed that allocation.  Mr. Daigle stated the allocation was done in “appropriation [accordance] with generally accepted accounting principles and is audited by third-party external auditors.” 

 

Continuing, Assemblyman Goldwater asked if the Nevada Department of Taxation had a need to audit the use tax for Mr. Daigle’s bank, would they go to Alabama.  Mr. Daigle replied the records would be provided here in Nevada.  Assemblyman Goldwater asked Mr. Daigle how his bank assigned value to services in Nevada, for example, the preparation of a balance sheet or a financial statement.  How did the bank apportion and value a general service?  In response, Mr. Daigle stated, within that general service provision, the bank was billed for those hourly services.  An itemized bill was received for all services, including travel or legal services, regardless of whether it was a Nevada firm or a New York firm.  Those itemized billings would allow them to accommodate that allocation process.

 

Chairman Parks recalled the testimony of Daryl Capurro in which he talked about the transparent nature of the tax proposal.  Chairman Parks had reviewed statutes in other states relative to the issue of transparency of the tax structure, and he asked Mr. Capurro to comment on that.  He asked if models had been followed that suggested the benefit of transparency. 

 

In response, Mr. Capurro clarified that was not part of his testimony; however, he offered his insights.  The trend in the business world was away from hiring more in-house employees to perform services.  In the trucking industry, Mr. Capurro explained that there was a return to concentrating on the core business, specifically moving goods throughout the state and the country.  Anything that was not related to that business mission had been outsourced for the past several years.  Mr. Capurro explained the reason for that was because the expertise resided outside the trucking industry in companies that had that knowledge.  He gave the example of janitorial services and stated he would not hire a janitor and be responsible for that employee’s benefits, payroll, and his supervision off hours.  That service was more easily outsourced, and a 5 percent service tax would not change that trend toward outsourcing services. 

 

Assemblyman Griffin posed a question on economic development issues and the impact of raising tax dollars on that effort.  He cited the example of Microsoft with offices in Reno and described that as a company that primarily provided services.  He asked if the licensing division of Microsoft was considered a service and if they would be affected by the services tax.  Assemblyman Griffin voiced concern that service-oriented companies that were coming to Nevada might be discouraged.  He recalled a proposal in the Committee on Commerce and Labor that dealt with Thrift companies, for example, the Harley-Davidson Financial Services.  The proposal was viewed as a great economic development opportunity.  Would those companies be subject to the services tax?

 

With respect to economic development of businesses that might come to Nevada to provide services, Mr. McMullen declared those new companies would be responsible for the tax on services provided within the state of Nevada.  With the sales of products for delivery to other locations, there was not a sales tax attached in those situations.  As such, a service that was supplied outside of Nevada would not be taxable under the same rules.  Mr. McMullen noted the BRG discussed the economic development of business in terms of taxes that scared new business away.  The gross receipts tax (GRT) appeared to be an anathema to many companies looking at Nevada.  The fundamental point was that a reduction in the sales tax on products by one-third would give the state a powerful argument that, if you relocated to Nevada and invested capital to build a plant, you would pay one-third less than the company would in a neighboring state.  If that company’s employees relocated to Nevada, as consumers, they would pay one-third less as well.

 

Without giving abatements or offering enticements of tax exemptions, Mr. McMullen believed the services tax package created a powerful economic development argument.  Although a few service-oriented businesses would be discouraged from relocating in Nevada, he predicted many others would be drawn to the state.  Part of the goal of the Business Representatives Group (BRG) was to rely less on gaming and tourism.  The need for economic diversification led into the discussions on the need for economic development.

 

Assemblywoman Pierce called attention to page 26 of Exhibit C and a report entitled “Taxable Services Used by the Affluent.”  One of the services was “banking (private banking, trusts, etc.)”  She requested clarification for those banking services that were only used by the affluent client.

 

Mr. McMullen explained the intention of the BRG did not claim that regular people did not use some of those services.  The BRG tried to minimize that.  The banking services on page 26 referred to the ones used by [certain] customers.  A regular individual just depositing funds and earning interest on an interest-bearing account was not considered to have a service component by the BRG; however, if an affluent person deposited a large amount of money in a trust or utilized a service, they would be assessed the service tax.  The tax would be related to the type of services provided. 

 

Assemblywoman Pierce cited the example of ATMs and asked if that would be a taxable service.  Mr. McMullen replied, “Unless you choose not to.” 

 

Mark Daigle offered to clarify and explained private banking and trust services were designed for use by wealthier people and by those with complex financial situations.  Those clients paid fees for those services.  A client with a large trust had to pay a fee to the financial institution for the management of that trust.  Mr. Daigle summarized by saying the issue was that the services that had an associated fee for transactions were taxed, and they tended to be connected with the more affluent clients.  Part of Florida’s original pitfall was in their attempt to impute a value for activities, such as teller transactions.  If a person made a mortgage payment at the teller window, how would that service be valued? 

 

Mr. Daigle concluded it was almost impossible to attach value to teller services and even more difficult to collect such a tax.  By the time a bank assessed, collected, and remitted the service tax on thousands of minor transactions, the bank would be into cost overrun.  Mr. Daigle reiterated his intent was to focus on those banking transactions where value was easily ascertainable.  He gave the example of the management of a $100,000 trust account, where there would be a fee of $1,000 for that service.  A 5 percent tax would be charged against the service amount.   

 

Assemblywoman Pierce summarized her understanding that there was no plan for an ATM or teller services fees.  Mr. Daigle admitted the specific definition had not been developed, and that was something that had to be determined as the bill was drafted.  He restated the idea was to tax those banking services where an identifiable fee was paid and to minimize the regressivity of the tax plan.  He speculated the Taxation Committee might lean in that direction. 

 

Assemblywoman Pierce referred to page 26 of Exhibit C, the list of taxable services for the affluent, and asked about the last item, transportation services.  She asked what that would include.  Mr. McMullen assumed it was similar to air transportation.  The BRG had attempted to be broad-based, and the categories of services were derived from the economic census.  As such, the BRG envisioned upscale transportation services, for example, limousine services. 

 

Assemblyman Goldwater summarized his understanding and stated larger bank accounts and trusts could be assigned value based upon the fees attached to those services.  Mr. Daigle confirmed there was a billed fee on those types of accounts.  Assemblyman Goldwater asked if those larger accounts ever received compensation or consideration for exemption of the fee based on the asset level.  Mr. Daigle declared that every bank had its own policy; however, there were different fee structures based on the size of a relationship between the bank and the client.  The initial cost to manage a $100,000 trust would be fixed.  On a larger trust account of $200,000 that fee might drop from 1 percent to 0.75 percent.  Assemblyman Goldwater concluded there was a relationship; specifically, as assets increased, fees decreased, and therefore, the tax would decrease.  Mr. Daigle countered that the relationship could work in the opposite way, and it depended upon the complexity of the relationship in terms of the management required.  While the percentage of the service fee would drop on a $200,000 trust, the amount earned would be actually greater.  A greater fee equated to greater tax revenues.

 

Assemblyman Goldwater replied, “Exactly, if that relationship exists, and the assets keep going up, and the fee keeps going down.”  He predicted the fee turned to zero with multimillion dollar accounts, and he asked how would the transaction of that service be fairly taxed if there were no service fee.  He added the fee could be “taken out in soft dollars,” for example, free trading or some free service.

 

In response, Mr. Daigle explained that two lines of business were being mixed in the current discussion.  When looking at depository services, where the bank retained the deposit on its books and redeployed those funds into the economy in the form of a loan, the bank did have a value associated with a larger relationship; however, that was not a “fee” for a service relationship.  A trust account would be a fee or service relationship.  A trust account was managed by the bank; however, the assets typically did not generate value to the bank.  Assets such as real estate, stocks, and securities were not redeployed by the bank to earn income.  As such, there was no scenario where the fee dropped to zero.  The larger it became, the more costly it became.

 

Assemblyman Goldwater responded that Mr. Daigle was actually making his point.  The issue was taxation and not macroeconomic theory.  He summarized Mr. Daigle’s testimony and stated, “If I come to you and move one of my trust customers, I get banks to waive trust fees.”  He recalled an excellent example made by Assemblywoman Pierce in which a person with only $100,000 would be charged a nonnegotiable 1 percent fee.  Assemblyman Goldwater stated that his customers, with much larger amounts of assets, had negotiable fees that were often lowered to zero.  The larger the asset level, the lower the fees for services.  He voiced confusion over how that situation would be taxed equitably.

 

Mr. Daigle requested clarification that the issue was deposited trust accounts and balances remaining on a bank’s balance sheet.  Assemblyman Goldwater asked if those accounts were taxable.  Mr. Daigle stated those trust accounts were a different type of account than what was referenced in an affluent customer service relationship.  That would be a trust fiduciary capacity assumed by the bank.  Mr. Daigle stated that in Assemblyman Goldwater’s example, Mr. Goldwater was the one providing the fiduciary capacity.  Assemblyman Goldwater countered, “We both are fiduciaries.”  Mr. Daigle responded, “I am holding the funds on deposit.”

 

Assemblyman Goldwater clarified he was attempting to figure the taxation in the valuation of services.  Mr. Daigle agreed that those were some of the details that would have to be addressed in actual drafting of legislation.  Whether or not there was a methodology for taxing a non-fee for service transactions was the thorny side of developing a source of services tax on imputed value.  The taxes and information utilized in determining the revenue base were not dependent upon a non-fee for service-based transactions.  Concluding, Mr. Daigle stated the funds that had been presented did not include the “non-fee for service transactions and did not include imputed value of transactions.  So anything that you could do to incorporate those into the equation would simply increase the value of the tax.”  

 

Chairman Parks announced that, due to time constraints, the discussion had to be concluded. 

 

Addressing Sam McMullen and the Business Representatives Group (BRG), Assemblyman Anderson referred back to a question from Assemblyman Goldwater on the subject of retention of dollars for collection of the taxes.  He voiced some surprise that the detail was lacking in that area of the testimony; however, in examining the paper report that dealt with education and accountability, it contained very precise detail, especially on matters that the business community would not fully understand.  Assemblyman Anderson stated, “I find that amazing.”  He understood the references to the sources of revenue by the BRG; however, he was disheartened by recalling the promise made in 2001 by businessmen that they would look for additional revenue for education.

 

Continuing, Assemblyman Anderson stated, “It was swapping dollars for LSST (local school support tax) for the local governments . . .“  He applauded the representatives of the BRG for appearing before the Committee.  Assemblyman Anderson concluded by saying the response from the witnesses to Assemblyman Goldwater’s questions and the issues regarding the tax collection system were incredulous. 

 

Mr. McMullen defended the absence of detail on the collection allowance and stated his group assumed none would be granted.  Secondly, with respect to education funding, one of the critical issues for the BRG was to always do whatever produced the highest quality education and a very efficient and effective funding level.  Consequently, the BRG included some of those issues that would address results.  The number of days, hours, and minutes of education was adopted by the BRG from the superintendents of public instruction.  Although the BRG did not consider themselves experts on education, Mr. McMullen affirmed that the BRG members recognized that they were consumers of that product.  The BRG had high goals for education, and, in 2001 they had declared it should be a collaborative result.  The involvement of educational expertise was essential.

 

Chairman Parks addressed the issue of the profitability of a company.  With regards to the gross receipt tax (GRT), there was a suggestion that businesses would fail because they would have to pay 0.25 percent GRT.  When considering the impact of an additional 5 percent service tax, Chairman Parks questioned whether that would also invite business failure, especially if they were highly leveraged into using services for their business operations.  The other area of concern, according to Chairman Parks, dealt with the time lines regarding when the LSST would decline and when that loss would be offset by the service tax.  He called attention to the proposed timeline of implementation on page 41 of Exhibit C, and he stated he was attempting to reconcile the implementation of the new service tax and the loss of the LSST. 

 

Mr. McMullen cautioned the Committee to be careful in allowing the immediate reduction of the entire LSST.  It would be advisable to guarantee that there were funds being generated by the service tax before the LSST was over-reduced.  He recommended that the Fiscal Division review that time line.  Mr. McMullen explained the BRG had proposed an initial reduction of 1 percent.  If a tax raised over $1 billion per year, it would easily accommodate the reduction of $350 million.  The BRG believed the two events initially would be implemented concurrently, followed by a ratcheting mechanism for the remainder.  Mr. McMullen did not see any confusion over the proposed implementation date of July 1, 2004, and revenues would be available for the second year of the biennium.  He admitted that implementation during the first year of the biennium might be viewed as aggressive. 

 

Chairman Parks recalled that approximately 10 percent of sales tax revenue was currently paid by the visitors to Nevada.  He asked if there had been any analysis to project how that would shift by moving to a sales tax on services.  In response, Mr. McMullen explained that was a function of the data, and an attempt by the BRG had been made to determine that impact.  They looked at transportation, amusements, admissions, entertainment, and other tourist services that might be purchased.  The BRG arrived at a figure in the 10 to 15 percent range; however, he was uncertain about the dependability of those estimates, especially if amusements and other activities became exempt.  Mr. McMullen reiterated that the BRG had looked at that issue, and “exportability is a wonderful thing if you can have that happen.”  Any new taxes would be less and less capable of being exported to tourists, and Mr. McMullen predicted the tax burden would fall on Nevada residents.  Property taxes or business license taxes would not be exportable to tourists.  In contrast, rooming taxes, gaming taxes, and a sales tax on products were not included in the BRG recommendations.  Mr. McMullen stated his group believed the new services tax would be paid, in great part, by tourists. 

 

Four documents were submitted by the witnesses testifying on behalf of the Business Representatives Group.  The first was entitled “Proposed Amendments to S.B. 382 – Proposed by Business Representatives Group” (Exhibit F).  The second was entitled, “Proposed Amendments to S.B. 382 – Board of Examiners-Sales Tax Reduction – Proposed by Business Representatives Group” (Exhibit G).  The third was submitted by Ray Bacon and was a copy of an article from the Reno Gazette-Journal entitled, “Report:  Nevadans’ Income Doesn’t Keep Up With Inflation” (Exhibit H).  The fourth document (Exhibit I) was a summary of the Business Representatives Group testimony from April 8, 2003.  It was co-authored by Kara Kelley and Sam McMullen.

 

Chairman Parks announced the testimony on the services tax was concluded.  After thanking the witnesses for their presentation, he invited testimony from Guy Hobbs in the Las Vegas audience. 

 

Chairman Parks asked Mr. Hobbs, as Chairman of the Governor’s Task Force on Tax Policy in Nevada, if there had been consideration of a sales tax on services and if there had been a recommendation in that area.

 

Guy Hobbs, Chairman of the Governor’s Task Force on Tax Policy in Nevada, commenced testimony and introduced Jeremy Aguero, Chairman of the Technical Advisory Committee to the Governor’s Task Force on Tax Policy in Nevada.  Mr. Hobbs emphasized his strong belief in evaluating the sales tax base, and he recalled raising that issue at every Committee meeting.  There was great concern about the future of the sales tax dependence, and a tremendous amount of analysis had been performed.  The Task Force examined the need to broaden the sales tax, based on the fact that the sales tax had been a major portion of state funding and would continue to be in the foreseeable future.  An outgrowth of that was the recommendation for a tax on admissions and amusements.  The two premiums attached to any tax recommendations were exportability and stability. 

 

Continuing, Mr. Hobbs explained that, based on a review of various areas of trade, the Task Force had settled on admissions and amusements as the areas with the highest score in terms of being discretionary and voluntary.  That area was also judged to be progressive, and the level of consumption would be greatly affected by the level of income.  Consumption increased with wealth.  Mr. Hobbs described the tax as exportable, because many amusements and admissions occurred on the Las Vegas Strip and, therefore, were not taxed. 

 

Mr. Hobbs concluded by saying the Task Force agreed that the tax base in Nevada was eroding.  Their recommendations revealed how well the economy had adjusted to expansion of the sales tax base to include some services, especially in the area of admissions and amusements.  Mr. Hobbs admitted the Task Force had struggled with developing blends of trade to meet the criteria of exportability and stability. 

 

On the notion of exportability, Mr. Hobbs recalled earlier questions on the impact of imposing the tax on services concurrently with the reduction in the sales tax on tangible goods.  Regarding the impact on tourism, the Task Force concluded that the state would receive fewer net dollars from tourists, thereby placing a greater tax burden on in-state taxpayers.  Mr. Hobbs acknowledged that time did not permit testimony comparing the gross receipts tax to the sales tax on services.  Chairman Parks agreed.

 

Jeremy Aguero, Chairman, Technical Advisory Committee, Governor’s Task Force on Tax Policy in Nevada, commenced testimony from Las Vegas.  He encouraged the Taxation Committee to use caution when viewing the estimates provided in earlier testimony.  He had high regard for the Chambers of Commerce; however, there were items that had to be re-examined.  The first issue was the total productivity of the sales tax on services.  Referring to the projection of $55 billion that had been cut in half, Mr. Aguero described it as a theoretical amount of taxes demanded by Nevada businesses and consumers.  In Mr. Aguero’s words, “Essentially what you do is take the aggregate demand, or what is produced in Nevada, subtract out that which is exported, and you add back in that which is imported.”

 

Mr. Aguero reiterated his concern to be cautious about the apportionment of those dollars.  There were many ways for the state of Nevada to attack the problem.  If the figure of $55 billion was assumed to be correct, it included a multitude of services; however, he acknowledged that the BRG had never assumed that all services would be subject to taxation.  Mr. Aguero was aware that the BRG had trimmed the list to include a group that had business-to-business transactions.  Mr. Aguero stated, “That was the distinction between the 75-25 and the 55-45 distinction between who pays that tax.”  If looking at the aggregate amount of $55 billion, that would include taxing services provided to governments and services provided to individuals.  If the figure was shaved down, Mr. Aguero reminded the Committee that not all services would be subject to taxation in the state of Nevada.  That included the $25 billion estimate, some of which would not be subjected to taxation. 

 

Continuing, Mr. Aguero stated it was his understanding, based upon a legal case in Oklahoma, that courts often drew a stark distinction between what was a gross receipts tax and what was a sales tax.  Each was taxed very differently.  Mr. Aguero voiced surprise concerning earlier comments regarding interstate taxation and the fact that it was possible that all of the trucks purchased by the interstate providers of transportation would face a lower rate.  Everything that was done concerning interstate transport would theoretically be subject to taxation.  The Oklahoma case was analogous to the situation in that the state had been attempting to propose a sales tax that was upheld by the Supreme Court.  That sales tax had been imposed on an interstate bus provider, specifically on the purchase of the ticket for traveling between states.  The state [of Oklahoma] upheld that the sales tax could be taxed 100 percent by the state of origin.  Mr. Aguero urged caution in making the distinctions regarding a sales tax on services, specifically what it would produce, who would carry the burden of the tax, and other questions.  Those answers were needed before suggesting the revenue estimates from any source would be accurate.

 

Mr. Hobbs offered some observations regarding the testimony of the Business Representatives Group (BRG).  Instead of arguing over numbers from past years, Mr. Hobbs emphasized it was important to focus on today’s numbers.  The Task Force spent considerable time doing that and modeling the current scenario.  He was unaware if any group had challenged the Task Force numbers.  Additionally, the Governor’s Office had produced its own projections, and the two sets of figures came within $2 million of each other.  Both were in the range of $704 million to $706 million over the biennium.  Mr. Hobbs reminded the Taxation Committee that all of the figures were projections, and the Task Force remained confident of those numbers. 

 

Continuing, Mr. Hobbs emphasized the Task Force felt strongly that any tax package recommendation should affect business, and not be one that hit the consumer directly.  He acknowledged the issue of pass-through and who ultimately paid a tax; however, he had no doubt that a tax on a transaction would be paid totally by the consumer.  In contrast, a gross receipts tax would not necessarily be passed through to the consumer.  The Task Force viewed the pass-through effect as a significant shortcoming of the proposal to expand the sales tax base beyond admissions and amusement tax increases. 

 

As a final point, Mr. Hobbs commented on another contrast in tax recommendations, specifically the regressivity of a tax.  The Task Force had a goal to minimize or reduce the impact on small or start-up businesses.  As a result, direct exemptions were provided for small businesses.  Referencing the BRG’s proposed sales tax on services, Mr. Hobbs emphasized that small businesses would not be insulated, and they would actually carry a larger tax burden.  That was in stark contrast to the proposal by the Task Force. 

 

On the issue of pyramiding, Mr. Hobbs stated it was common to most taxes.  In the comparison of various services, such as accounting, legal, or landscaping, those services became part of the cost structure at the end of the business day.  Absorbing those costs with a 5 percent tax premium versus absorbing them with a 0.25 percent premium created a striking difference in the amount of pyramiding that might occur.  To illustrate that point, Mr. Hobbs stated there would be a 20 times difference between the two.  He emphasized there would have to be a lot of pyramiding at the 0.25 percent scenario to achieve the pyramiding effect of the 5 percent services tax. 

 

In closing, Mr. Hobbs clarified he had sent a letter to Speaker Perkins approximately two weeks previously, and that letter was designed to answer a similar question that had been asked of the Taxation Committee.  He offered to provide a copy of that letter to Chairman Parks. 

 

Chairman Parks stated the letter had been distributed to the Committee on Taxation.

 

On the subject of a tiered gross receipts tax, Assemblywoman Gibbons voiced confusion over the actual number of businesses.  Was it 85,990 businesses, 120,000 businesses, or 160,000 businesses?  Mr. Hobbs requested that Jeremy Aguero respond to the question.  A significant part of the difference was due to the inclusion of sole proprietorships.

 

Mr. Aguero explained that the Task Force used a baseline of 100,000 businesses.  That conclusion was based upon multiple sources of business statistics.  The estimate of 160,000 included all businesses, including sole proprietorships.  Being at the upper end of the estimate numbers was probably more realistic; however, the Task Force ultimately chose to be conservative, and that resulted in an estimate of 100,000 businesses.

 

Assemblywoman Gibbons requested clarification on how much annual revenue would be raised by the Task Force proposal.  Mr. Aguero replied it was $230 million per year.  Mr. Hobbs interjected that the amount would be derived solely from the gross receipts tax (GRT).  Assemblywoman Gibbons clarified that she was asking only for the estimate from the GRT.  Mr. Aguero confirmed that number was $230 million per year. 

 

In response, Assemblywoman Gibbons declared she had estimated $359 million annually based on 85,000 businesses.  On 120,000 businesses, she estimated $400 million annually.  Mr. Hobbs offered to reconcile the difference between the numbers at a later time.  Assemblywoman Gibbons expressed her disappointment that her e-mails to the Task Force had gone unanswered.  Mr. Hobbs stated he would be available the following day to discuss the discrepancies in the estimates.

 

Assemblyman Goldwater stated that ease of administration of any tax was of high importance.  When the Task Force had considered a sales tax on services, Assemblyman Goldwater asked if the group had envisioned the administration of that tax.  He added that the bulk of it would be tied up in use tax returns, and he voiced concern over the state’s past experience in “policing” that.  Would every Nevadan be required to file a use tax return?  He asked the witnesses to compare the administration of a sales tax on services to other proposals that the Task Force had considered.

 

From a philosophical standpoint, Mr. Hobbs explained the Task Force did not make progress in developing a sales tax on services proposal, with the exception of admissions and amusements.  One of their concerns was the total number of incidents [businesses and consumers], meaning if all consumers were included, a much larger population would be affected by the new law.  Mr. Hobbs admitted it was easier to make comparisons with the gross receipts tax (GRT) or a similar tax.  The final tax proposal issued by the Task Force had exempted approximately 50 percent of the businesses.  He predicted that would have a corresponding reduction in terms of the enforcement efforts by the Nevada Department of Taxation.  In summary, Mr. Hobbs estimated the total number of audits required under their proposal would be substantially less with a gross receipts tax than it would be with a sales tax that included all consumers and visitors within the state.

 

Chairman Parks invited the representatives of the A.C.R. 1 Task Force to make closing remarks.  Mr. Hobbs offered to provide any additional documentation to the Taxation Committee that had not been included in their voluminous report. 

 

Chairman Parks invited new witnesses to testify.

 

Lisa Guzman, a social worker, commenced testimony in opposition to the services tax proposal.  Her husband was a [self-employed] carpenter, and her family owned a home in Sparks.  Ms. Guzman expressed concern that, despite their hard work, they had little to show for those efforts at the end of the month.  Her lifestyle was in no way extravagant and, after paying the monthly bills, her family was unable to save money for their daughter’s education and for the future.  The proposed services tax would do harm to families because it would take away more money at the end of the month.  Services that were purchased by businesses would come at a higher price. 

 

Ms. Guzman described the education system as “deplorable,” and it caused her concern about choosing Nevada as the right place to raise her child.  The areas of human services and education had to be improved; however, forcing low-income and middle-income families to pay the bill would not be the answer.  Big businesses should be forced to pay their fair share through a broad-based business tax, such as the gross receipts tax (GRT).  Ms. Guzman urged the Committee to consider the hardships that would be created by the services tax.  She predicted more families would be forced into the social welfare system.  The solution was to make big business pay its fair share.

 

Joe Edson, Field Organizer, Progressive Leadership Alliance of Nevada (PLAN), commenced testimony in opposition to the services tax proposal.  His organization had multiple reasons for opposing the proposal.  It was not a broad-based business tax, and that requirement had been clearly identified by the Interim Task Force on Tax Policy.  Mr. Edson, in reference to the Task Force, stated, “This expertly qualified group of experienced, conservative, business-minded individuals concluded that the state activity or the gross receipts tax most ably met the needs of a stable, sufficient, and most effectively-administered means of broadening Nevada’s revenue stream.”

 

Secondly, Mr. Edson stated the services tax was simply a sales tax.  As such, it was as regressive and volatile as the existing sales tax, now at the mercy of the boom and bust economic cycles.  The burden fell on the low-income and middle-income Nevadans.  Despite the attempt to exempt some direct services, the businesses that would have to pay the service sales tax would be forced to pass the cost on to consumers in the form of higher prices. 

 

Continuing, Mr. Edson stated that the proponents of the services tax had argued that the cost of a gross receipts tax (GRT) would also be passed through to the consumer; however, the GRT had a $450,000 base exemption which precluded more than 60 percent of Nevada’s businesses.  In contrast, the services sales tax would be paid by all businesses, regardless of their size or profitability.  Because of that fact, Mr. Edson emphasized it would affect smaller businesses in a disproportionate way.  Big businesses often employed service-oriented employees, whereas small businesses almost always contracted for services from the outside.  That would cost the latter group an additional 5 percent “straight off their bottom line.” 

 

Finally, Mr. Edson declared the services sales tax was just another attempt by big business, especially the major, national retail chains, banks, and construction firms, to avoid paying their fair share.  Nevada needed economic diversification, but it had to be in the form of responsible corporate citizens who were willing to invest in the welfare of their workers, the quality of life, schools for their children, and affordable quality health care.  In summary, Mr. Edson stated the proposed services sales tax was not a broad-based business tax.  It was simply a regressive sales tax, and it harmed small business, while it favored big business.  It was unfair and unstable, and it would hurt the majority of Nevadans by expanding the status quo of Nevada’s current revenue crisis.  Big business would continue to dodge paying its fair share in the state where they reaped considerable untaxed and exported profits. 

 

Bob Fulkerson, State Director, Progressive Leadership Alliance of Nevada (PLAN), commenced testimony and remarked that the proposed tax bill should be labeled the “No exemptions left behind act.”  Referring to the long list of exemptions to the proposed sales tax on services, Mr. Fulkerson stated that he failed to understand how that list was developed until he saw the names of the Board members of the Chambers of Commerce.  He recalled their earlier testimony that their Board members would be encumbered for the tax as would many others; however, Mr. Fulkerson did not hear them admit that 100 percent of those Chamber of Commerce member businesses would be ultimately covered by the exemptions. 

 

Mr. Fulkerson urged the Committee to look at that list closely.  It contained construction, government, new facilities, and new utility structures.  He stated another name for the tax proposal should be the “construction industry free ride tax.”  Equally striking was the exemption on advertising and broadcasting.  Mr. Fulkerson voiced serious doubt that the exemption list was designed to accommodate the typical purchases of an ordinary household.  There was no protection for the working family or small business.  Not on the long list of exemptions were lower- and middle-income families and workers.  He added, “Maybe they do not have a seat on the Chamber of Commerce Board of Directors.”  He illustrated his point by adding that the real estate category included a tax on the rent for apartment-dwelling workers.

 

In conclusion, Mr. Fulkerson declared the services tax was nothing more than a sales tax, a tax category that was known to be inherently regressive.  Giant corporations would continue to pay nothing in Nevada, even though those same corporations paid business revenue taxes in 46 other states, including all of Nevada’s neighboring states.  Numerous studies had revealed that Nevada had one of the most regressive tax structures in the nation.  The infamous Price Waterhouse study was quite blunt when it stated, “The state and local tax system is unfair.  There is no tool in the Nevada fiscal system designed to even out the tax burden across income classes.”

 

The proposed services tax would make a bad situation worse, according to Mr. Fulkerson.  It was nothing more than a “slight-of-hand” by the business community to magically make the gross receipts tax (GRT) disappear.  The business community was avoiding its responsibility to pay its fair share of taxes in Nevada.  Educational and social needs continued to go unmet.  Mr. Fulkerson declared, “We need to raise taxes, but we need to do it fairly.”  Big businesses did not pay their fair share when compared to other states.  The middle-income and low-income residents were paying more than their fair share due to the regressive nature of Nevada’s tax structure.  Increases in sales tax and the services tax would disproportionately affect middle-income workers.  Mr. Fulkerson encouraged the Committee to “kill the services tax and impose a broad-based business tax.”  

 

Assemblyman Mortenson offered his compliments to Ms. Guzman for taking time to testify.

 

Danny Thompson, representing the Nevada AFL-CIO, commenced testimony by explaining his position on taxes.  Following the 2001 Legislative Session, his organization held its political convention in Reno and debated all of the tax proposals.  Their discussion had started with the concept of an increase in the gaming tax.  When it was determined that more than 46 percent of Nevada’s budget was derived from gaming-related business, increasing the gaming percentage was not considered an option.  In Mr. Thompson’s words, “It could kill the golden goose.”  He remarked that the events of September 11, 2001, sent that message to Nevada, in that 16,000 people lost their jobs in Las Vegas.  Visitor numbers dropped, and 46 percent of Nevada’s income disappeared.  According to Mr. Thompson, it would not be prudent to increase Nevada’s dependency on gaming revenues.

 

Continuing, Mr. Thompson stated his organization looked at mining, an industry that had no control over the cost of production or the market value of precious metals.  Nevada’s mining industry paid taxes, provided good jobs, and drove the economy of rural Nevada.  The AFL-CIO convention group decided against any increase in taxes for that industry.  Most of the debates had mixed support, with some convention members in favor and some against the tax under discussion.  That was true until the subject of the sales tax on services was raised.  Mr. Thompson reminded the Committee that there were 300 convention attendees who represented every major organization.  Not a single person wanted to raise a tax on services.  Without exception, every speaker denounced the services tax proposal; however, every person supported a broad-based solution for Nevada’s problems.  Mr. Thompson reminded the Committee that he represented 165,000 union workers.  Union members earned 26 percent more than their counterparts in the same industry.  The tax on services would directly hit “the things that they do.” 

 

Mr. Thompson stated he had monitored the list of taxable services through the months, and he declared the Chamber’s list was a “moving target,” as it continued to change.  Mr. Thompson declared the numbers changed from day to day.  He claimed even the Chamber of Commerce could not explain their list or their numbers to him.

 

Continuing, Mr. Thompson stated it was a 10 percent sales tax on the members of the Nevada AFL-CIO, and his organization was opposed to that.  The membership already paid its fair share, including real estate tax, property tax, gasoline tax, and some of the highest motor vehicle registration fees in the nation.  Mr. Thompson reiterated it was time for others to pay.  The only solution would be one that spread the tax burden across-the-board.  The sales tax on services did not solve the problem.

 

As a freshman legislator in 1981, Mr. Thompson recalled the passage of legislation that created the tax shift [to sales tax], and he voted against that tax shift.  The tax shift was in response to Proposition 13 in California.  He stated, “I am here today to tell you, I told you so.”  In conclusion, Mr. Thompson’s organization, the Nevada AFL-CIO did not support the sales tax on services, and he encouraged the Committee to vote against the proposal.  The projections of revenue were not verifiable, and the proposal had too many unanswered questions.

 

On the issue of regressivity, Mr. Thompson emphatically stated that Nevada already taxed the people at the lower end, as much as 8.3 percent of that group’s income.  He illustrated his point with the example of hiring an attorney for a divorce or a worker compensation claim, where the person had no choice in hiring that legal service.  He concluded by saying, “This is an insane proposal.”  Mr. Thompson voiced confidence that the Committee members’ constituents did not support the services tax, and he implored the legislators to vote against the proposal.

 

Glen Arnodo, representing the Culinary Workers Union, commenced testimony and called attention to one of the slides from the PowerPoint presentation made by the Chamber of Commerce [Business Representatives Group].  The slide was entitled “Nevada Annual Average Household Expenditures” [on page 36 of Exhibit C].  At the bottom of that table was the projection that the average household would benefit from the sales tax on services, and the total savings per household would be $250 per year. 

 

To illustrate his viewpoint, Mr. Arnodo cited the example of one family who was a member of the Culinary Workers Union.  That member provided Mr. Arnodo with a list of their household expenses for the last three years (Exhibit J).  The list was analyzed to determine the impact of the Chamber of Commerce proposal to tax services.  The family was described as being a two-income household, homeowners, and owning two cars.  Under the Chamber of Commerce proposal, Mr. Arnodo estimated the family would pay an average of $912 in taxes per year.  Even with the Chamber’s assertion that lowering the sales tax would cause a reduction of $200, that family would still pay more than $700 per year in new taxes. 

 

Looking at Exhibit J, Mr. Arnodo reviewed the family’s specific expenses.  Selling the family home would cause an additional expense of $390, plus an extra $140 to purchase the new home.  The real estate taxes were a greater burden for families of modest means, and, therefore, regressive.  Refinancing the mortgage resulted in an additional $138 in costs.  Banking expenses and service fees on transactions would cause an additional tax of $44 per year.  Mr. Arnodo reminded the Committee that banks already were allowed to charge outrageous fees for the use of ATMs, and now they wanted to add another tax on top of that. 

 

Continuing, Mr. Arnodo stated the application of the sales tax on services was also regressive.  If a large balance was maintained in a bank account, the fees for services were customarily waived.  Working people were more likely than the wealthy to pay that portion of the tax.  Continuing with the example, Mr. Arnodo addressed retirement fees and stated the family had a 401(k) and two IRAs.  Each of those retirement accounts had administrative fees, as did the mutual funds, and the sales tax for those services would cost that family an additional $26 per year.  He reiterated that high balance retirement accounts often had the administrative fees waived, leaving smaller savers a disproportionate share of the tax burden.

 

Regarding the expense of legal fees following a car accident, Mr. Arnodo stated the family would be charged an additional amount of $1,600.  The car accident was the fault of the other driver, and the proceeds of the legal action primarily paid for medical expenses and attorney’s fees.  Taxing legal services for individuals would affect working Nevadans who sought help with adoption issues, collecting child support, or seeking a divorce. 

 

Continuing, Mr. Arnodo explained that one of their biggest discussions centered on whether or not rent would be taxed as a real estate service.  The definition of real estate provided by Applied Analysis included, “Real estate operators, owners, and lessors of real property.”  Because the family under discussion owned its home, rent was not included in the list; however, taxing an average rent of $1,000 per month would cost the family an additional $600 per year in taxes.  Mr. Arnodo emphasized that taxing rent was obviously regressive.  Taxing bus transportation was another example.

 

In contrast, Mr. Arnodo predicted that large corporations would adjust their business models to avoid paying the sales tax on services.  Most large businesses would utilize inside attorneys, accountants, and engineers.  Alternatively, large corporations could export their services to other states.  Mr. Arnodo posed the question, “Why would Wal-Mart use accounting services in Nevada if they can pay for them in Utah and avoid the Nevada service tax?”  Compounding that scenario would be the ability of that large corporation to deduct those expenses from their Utah corporate income taxes.  He asked, “How does that broaden the tax base to include the large corporations who profit substantially from Nevada’s growth and pay next to nothing for the growing needs of our state?”

 

Continuing, Mr. Arnodo reminded the Committee that Nevada already relied on volatile tax revenues for most of the state budget.  In his judgment, a service tax was not only volatile, but it was very unpredictable.  It was not the long-sought  “third leg of the stool.”  While Nevada exported more than 28 percent of the sales tax to tourists, Nevada would export service work to other states.  That would leave working Nevadans paying the bills.  Mr. Arnodo described the Chamber of Commerce materials as misleading, at best, when they showed the average Nevada family as being exempt from all service taxes. 

 

Mr. Arnodo reiterated the need for a broad-based business tax, so that the large corporations, such as Wells Fargo, Bank of America, and Wal-Mart, would be encumbered to pay taxes on the money earned in Nevada.  Under the Chamber of Commerce proposal, the average family with a $50,000 household income would pay $700 per year in taxes.  That was equivalent to 1.4 percent of their income being diverted to taxes.  Mr. Arnodo suggested that, if the Chamber of Commerce actually had the intention of forcing the average family to pay 1.4 percent in taxes, it might be appropriate to revisit and raise the gross receipts tax of 0.25 percent.  If the Chamber of Commerce was willing to tax a working family at the rate of 1.4 percent, then it would be fair to tax Wal-Mart at 1.4 percent on their revenues earned in Nevada.  That would bring the state of Nevada an estimated $14 million in revenue from Wal-Mart, a corporation that was estimated to earn more than $1 billion in Nevada each year. 

 

In summary, Mr. Arnodo shared his personal experience with using an ATM, where he received the message, “You are being charged a fee of $2.50.”  With that in mind, Mr. Arnodo  referred to previous testimony from the banker where the banker had been unclear if ATM fees would be taxed.  The logic of the banker was that it would not be worthwhile for the bank to pursue a small fee on every small transaction.  Mr. Arnodo challenged that logic and asked, “If it is not worth the paperwork to do that, then don’t charge me that $2.50 fee on my ATM card to begin with.”  Mr. Arnodo agreed that fervent debate had been heard from business interests on the services tax proposal; however, he urged the Committee to remember the example of that one working family who would pay more taxes proportionally than the Chamber would require of Wal-Mart, Bank of America, or Wells Fargo. 

 

Assemblyman Goldwater commented that, in his legislative career, he had never seen more advocates speaking on behalf of the “little guy.”  He voiced appreciation to the witness.  Assemblyman Goldwater asked, “Who is here representing the big guy?”  Looking at the audience, Assemblyman Goldwater observed two “big guys,” surrounded by, what appeared to be, a multitude of representatives for the “little guy.”  Assemblyman Goldwater commented, “I think maybe they have their definition of ‘little guy’ confused.”

 

Danny Coyle, President of the State of Nevada Employees Association/American Federation of State, County, and Municipal Employees (SNEA/AFSCME) Retirees, and Representative, Legislative Committee, Nevada Alliance for Retired Americans (NARA), commenced testimony in strong support of the Governor’s tax plan for a broad-based tax structure.  Mr. Coyle commented that previous testimony by the “big guys” had not convinced him of the merits of their case.  His definition of the “little guy” was the retired citizen on a fixed income with little hope for a cost-of-living increase, and Mr. Coyle viewed himself as a “little guy.” 

 

Mr. Coyle called the Committee’s attention to his prepared testimony (Exhibit K) and stated he would not take the time to read it aloud.  His SNEA associate, Scott MacKenzie, had departed the hearing; however, he commented that their General Counsel had passed a resolution to support the Governor’s broad-based tax plan.  A copy of that resolution was scheduled for delivery to the Governor’s Office, and copies had been distributed to the Committee by Mr. MacKenzie. 

 

Noreen Nyikos, representing the American Civil Liberties Union (ACLU), made a brief statement and said, “While I will not even venture to say that the ACLU is at all advocating that legal services across-the-board be exempted from this tax scheme, should it choose to be passed here, I do feel that it is necessary to mention that the practical implications of this service tax do raise significant constitutional questions involving right to counsel and an indigent’s right to counsel.”  

 

Bonnie Parnell, representing the League of Women Voters of Nevada, distributed a newspaper article (Exhibit L) from the April 22, 2003, edition of the Reno Gazette-Journal.  It was entitled, “State study: Services tax would cost more, earn less than gross receipts plan.”  Ms. Parnell stated the League continued to support the passage of a broad-based tax.  It was needed to create stability and generate new revenues to fund the basic needs of the state of Nevada.  She emphasized that students, senior citizens, and state services should not continue to suffer for lack of a broad-based tax.  Extending a tax on services, especially one with a multitude of exemptions, did not meet that goal.

 

Continuing, Ms. Parnell explained that the League had addressed the issue of a tax on services, and their principal concern had been the lack of a thorough study of such a tax.  The League of Women Voters remained supportive of the fundamental concept and approach of the Governor’s Task Force on Tax Policy.  That Task Force deliberated for many months and concluded that the tax on services would not be sufficiently broad-based to solve the fiscal dilemma and vulnerability of the tax situation.  On behalf of the League of Women Voters, Ms. Parnell urged the Committee to oppose the imposition of a tax on services. 

 

Referring to the 1989 Price Waterhouse report, Ms. Parnell stated the legislative body had been aware that Nevada had to reexamine its tax structure.  The Nevada Legislature had supported the business activity tax (BAT), and that was the only fundamental change to date.  In 2002 the Teachers Association had been concerned enough to float the “Teachers’ Tax Initiative.”  She recalled it created an uproar in the election of 2002.  That initiative was removed from discussion due to legal action.  Ms. Parnell also recalled that, at that point in time, a good faith gesture was extended by businesses who came to the table and declared, ”We will work on it in the interim, and we will come to you united in the 2003 Session.”  Ms. Parnell voiced her deep disappointment that it did not happen, as promised. 

 

With the passage of A.C.R. 1 and the appointment of a diverse group to the Governor’s Task Force, there had been a thorough examination of the potential impacts of a variety of tax proposals.  Ms. Parnell voiced her strong support of the Task Force efforts, and she encouraged the Committee to support their findings.

 

Paula Berkley, representing the Reno Sparks Indian Colony, commenced testimony against the proposal.  If the services tax was imposed with a concurrent decrease in sales tax, the effect would be devastating to all Indian tribal governments, according to the witness.  She explained the tribes had entered into intergovernmental agreements with the state of Nevada, saying that they would charge equal or greater taxes and collect sales and excise taxes on Indian reservations.  Ms. Berkley explained that the agreement had become the model for most other states and had been widely adopted nationwide.  It had created a level playing field for both the tribes and the states. 

 

Continuing, Ms. Berkley stated that, for the Reno Sparks Indian Colony, the proposed sales tax decrease would have a negative impact of approximately 30 percent on sales tax collections.  She stated there were three points that made the Indian Colony unique.  The first was that the tribes only had two taxes to collect, namely sales tax and cigarette taxes.  If 30 percent were removed from that revenue, the consequences were serious.  The second point was that the Colony had not increased taxes for ten years, because raising taxes had always been viewed as counterproductive.  The third point was that the Colony had municipal bonds, whose guarantee was based on the sales and cigarette tax revenues.  If the tax were lowered, the bond agreements would be jeopardized, as would be future bond ratings.  The covenants of the bond rating had specific requirements.  In Ms. Berkley’s words, “We cannot reduce the rate of taxation in any manner that might have a material effect.”  She stated that 30 percent would be considered a material effect.

 

In terms of solutions, Ms. Berkley declared that it was not an option to raise taxes and destroy their economy.  The bond agreements had to be upheld.  The only remaining option was to cut services, a daunting prospect.  She explained that she had not presented the information to the Tribal Council; however, she predicted the first topic of discussion would be the excise taxes that were targeted for decrease had already been spent.  Land had been purchased for a new health care center, and $1.5 million in grants had been obtained.  The health care center would serve the Indian Colony, as well as all Indians in the Reno-Sparks area.  She warned the construction project would be halted if their tax revenues were reduced.  Additionally, the existing clinic that was funded by federal funds would have to be closed due to an existing mold contamination problem.  Ms. Berkley predicted that every Indian with a health need would show up at Washoe Medical Center as an indigent patient.  That would be very costly to the state of Nevada.

 

Ms. Berkley declared the obvious solution would be to sufficiently raise excise taxes in order to offset the proposed sales tax decrease.  That would ensure that the bond agreements would be upheld, and bond ratings would not suffer.  She voiced concern that the services tax would be imposed without a corresponding increase in excise taxes.  The effect would be an eight-cent per pack decrease in the cost of cigarettes. 

 

Chairman Parks interjected that time was running short, and he asked the witness to conclude her comments.

 

Ms. Berkley believed that the potential negative effect on the tribal governments was not intentional, and she had faith in the Committee that they would take her testimony into consideration.

 

Ms. Berkley submitted a letter (Exhibit M) from Susan Meuschke, Executive Director of the Nevada Network Against Domestic Violence (NNADV).  The letter voiced opposition to the imposition of a services tax on legal fees.

 

Brad Spires, representing the Nevada Association of Realtors, initiated his testimony with remarks addressing the multifaceted aspect of the services tax as it related to the fee-intensive nature of real estate transactions.  The issue had been mentioned by several other speakers; however, he wanted to recap the items involved in closing a real estate deal that would be affected by the services tax.  They included escrow fees, recording fees, appraisal fees, flood certification fees, and inspection fees.  The latter category would include inspection for pests, mold, radon, asbestos, and structural defects.  It would also include the costs to remedy any discoveries from the inspection process. 

 

Continuing, Mr. Spires stated there would be legal fees, accounting fees, and realtor fees.  If the real estate deal involved a commercial transaction, there would be engineering and architectural fees as well.  The closing of a real estate transaction could involve 15 individual taxable fees.  The purchase of a home for an entry-level buyer could be cost-prohibitive with the addition of the fees from the proposed services tax.

 

Chairman Parks asked for an estimate of added costs due to the services tax for the purchase of a typical home priced at $180,000.  Mr. Spires stated that the costs would be highly variable due to mitigating circumstances, for example, mold damage or pest control.  The base number for escrow recording, appraisal fees, flood certification, and realtor fees would be between $2,000 and $4,000 of taxes on those services.  He considered it significant. 

 

Dennis Meservy, representing the Nevada Society of CPAs (NSCPA), stated he was also President of the Las Vegas sector of the Taxation Special Interest Group.  He commenced testimony in opposition to the services tax proposal.  He commented he had previously provided the Committee with a copy of his report on the services tax issue.  His group had also performed a study on the Nevada Tax Proposal.  He encouraged the Committee to review both reports.

 

Speaking for a group of Certified Public Accountants (CPAs), Mr. Meservy explained his group was often contacted for professional advice on tax law.  It gave his organization a good understanding of the businesses and individuals who paid taxes in Nevada.  Their official position was, “The sales tax on services should either not be implemented or, if it was implemented, it should be applied to all service providers at a rate that would be competitive with other states’ income tax rates.”  Citing the example of a sole proprietor business with $400,000 in gross receipts, Mr. Meservy estimated that 12 percent of the net income tax would be assessed for services tax.  That exceeded a California income tax rate. 

 

In conclusion, Mr. Meservy declared the services tax would discriminate against small and emerging businesses.  It was not broad-based, because half of the services would be excluded, and he believed that all services should be included.

 

Michael Bosma, Cochairman, NSCPA Taxation Special Interest Group, continued with the testimony.  In addition to all of the previously discussed problems, there was no ease of administration.  Many practicing accountants in states that had enacted a services tax were complaining there were problems in just trying to define taxable services.  Mr. Bosma cited an example of an accounting firm that bought tangible personal property.  Under the current Nevada laws, sales tax was paid on that purchase.  Nationwide, states grappled with the question of sales tax if that tangible property was purchased for resale.  Mr. Bosma stated emphatically that the complexity of business deals and the administrative costs became very burdensome.  His experience with Nevada was that there was no large infrastructure to issue regulations and definitions that would reveal how a taxing body would rule.  Mr. Bosma attributed that to the fact that Nevada was known to be a pretty efficient state; however, the sales tax on services would change that dramatically.  It was difficult to distinguish between the sale of tangible personal property and the sale of taxable services.  He admitted there was a lot of documentation from case law on the definition of personal property; however, case law was lacking in the area of defining a service.  Additionally, if the services were selectively taxed, Mr. Bosma voiced concern about that decision.  Most states had a component of both, according to the witness. 

 

Continuing, Mr. Bosma stated another huge issue in the area of administration and collection of the proposed tax was how it would be apportioned.  Currently, their accounting practice in northern Nevada was comprised of 25 percent of non-Nevadan clients.  Providing professional services to California businesses was a favorable enterprise; however, the proposed services tax would put his company at a significant disadvantage. 

 

Conversely, Mr. Bosma asked, “How do you apportion services normally?  Tangible personal property would all be sourced wherever the title transferred.  You know where that point is.”  That was not the case with services because most were a mixed bag of events.  He cited the example of apportioning the tax in an architectural firm where the drawing of the plans might be performed in anther state.  Mr. Bosma voiced concern that in-state service providers would be put at a tremendous disadvantage, especially because the surrounding western states did not charge a sales tax on services.

 

The other significant issue was related to the fact that many states did not charge a tax on manufacturing equipment.  That was considered tangible personal property.  Mr. Bosma stated many companies doing business in Nevada were not accustomed to worrying about personal tangible property if they were out of state.  In the company’s home state, for example, New York, there was no sales tax on manufacturing equipment; it was exempt.  Mr. Bosma predicted those companies doing business in Nevada would be in a dilemma, because they might not be aware they would be required to collect the new tax.

 

Continuing, Mr. Bosma referred to the multitude of service providers that were unaccustomed to collecting a sales tax.  He alluded to the previous example of a bank that hired an accounting firm.  Mr. Bosma described Nevada as a “sellers privilege state.”  If the accounting firm hired by the bank had nexus in Nevada, the tax burden would fall on the out-of-state services provider, and they would not be aware of that.  He viewed that as a potential problem for a considerable time, until companies became knowledgeable about their tax liability.  The infrastructure did not exist to track those service providers. 

 

Mr. Bosma concluded by saying the imposition of a sales tax on services would be very burdensome from a cost perspective, and it would be uncertain which services were taxable for many businesses. 

 

Assemblyman Hettrick commented that Mr. Spires misspoke on his projected numbers.  Assemblyman Hettrick’s calculations revealed that, for a $200,000 house with $20,000 of associated services, a 5 percent tax would only amount to $1,000, not $4,000.  No real estate sale would be likely to have 10 percent fees of any kind.  As such, the tax impact was overstated by the witness, and Assemblyman Hettrick estimated the tax would be closer to $450 on a $200,000 home at the time of sale.

 

Assemblyman Goldwater stated, “This is the problem with the sales tax on services.  I can tell you a real estate deal where a commission is paid and an interest in a particular property is taken by the broker who takes it.  Tell me how you apportion that out.  Does it end up being 10 percent?  Sometimes it ends up being more.”  Assemblyman Goldwater questioned who had the tax liability, how much the sales tax would be on the service, and how would it be apportioned.  He viewed it as an impossible situation. 

 

Assemblyman Hettrick offered to clarify citing the state of New Mexico as an example of a state that charged a gross receipts tax.  For that state, it was a sales tax on services.  It currently appeared on the bottom of every invoice, and New Mexico had determined a method to apportion that tax burden.  He suggested that the New Mexico model could be reviewed for ideas.  Assemblyman Hettrick added that, for every horror story about one tax, there was a horror story for others.  There was no one tax that would win total support.

 

Continuing, Assemblyman Hettrick asked to comment on Ms. Berkley’s testimony.  He explained the intent of the proposal was to replace the local school support tax (LSST).  As such, it could be inferred that it was not reduced; rather, it was replaced.  As such, it would not require as much reduction in sales tax as Ms. Berkley had feared. 

 

Chairman Parks clarified that Ms. Berkley’s point was that there were no services to replace the sales tax.  Time did not permit further debate on the subject.  Chairman Parks asked for testimony from the Las Vegas audience.

 

Lee Barrett, Las Vegas Realtor, commenced testimony from Las Vegas and stated the consumer would be taxed multiple times if the service tax were passed.  There were other taxes associated with the real estate business, including the transfer tax and property taxes in local markets.  Mr. Barrett emphasized his concern was that a real estate transaction rippled into a multitude of other services, and those providers and clients would incur extra fees in the form of the sales tax on services.

 

Russ Fields, President, Nevada Mining Association, introduced Michael Brown, Vice President of Public Affairs, Barrick Gold Corporation.  Mr. Fields distributed a copy of his prepared statement (Exhibit N) and commenced testimony in opposition to the services tax.  His organization represented a wide variety of mining companies, suppliers, and individuals involved in mineral exploration and development.  Mr. Fields commended the Committee for tackling the difficult issues.  Having served for one year on the Governor’s Task Force on Tax Policy, he had firsthand understanding of the issues.

 

Mr. Fields declared that the mining industry was willing to pay its fair share, and they called on all other business sectors in Nevada to do the same.  Mining played a special role in the state, especially in rural Nevada where it was the largest single employer and represented 13 percent of gross state product for the rural areas.  There was a popular misconception that the mining industry was enormous; however, that was no longer true.  Mining represented only 1.9 percent of the gross state product. 

 

According to the Task Force report, the economy of Nevada had changed enormously.  In modern Nevada, gaming, mining, and government accounted for approximately one-half of the gross state product.  Other industries, such as finance, insurance, real estate, manufacturing, construction, retail, and wholesale trade accounted for the remaining one-half of the gross state product.  Mr. Fields called the Committee’s attention to a table (Exhibit N) that illustrated the differences between the industrial sectors.  Mining, as with gaming, already paid an industry-specific tax, called the “Net Proceeds of Minerals” tax.  Half of that revenue was retained in the rural counties, and that reduced the need for the urban areas of Nevada to subsidize rural Nevada. 

 

Reading from his prepared statement (Exhibit N), Mr. Fields stated that no other business sector, with the exception of the insurance industry, paid any form of industry-specific tax, and he did not think they should.  He believed that all business sectors should step forward in support of the Governor’s plan to implement a broad-based business tax.  In 1989, the Board of Directors for the Nevada Mining Association (NMA) realized that the state of Nevada was changing.  It was anticipated that new taxes would be needed, and the NMA was one of the first industry groups to adopt a policy on new taxes.  The NMA Board had revisited that policy in 2003 and issued an opinion that any new tax proposal should be broad-based and include all sectors of the Nevada economy.  The new tax should be apportioned according to the taxpayer’s ability to pay and should not be focused on specific industries, individual citizens, or companies. 

 

During his tenure on the Governor’s Task Force, Mr. Fields explained they had considered and rejected a sales tax on services.  It was not viewed as a solution to Nevada’s fiscal crisis.  The Task Force had concluded that a tax that was more targeted at businesses and less targeted toward the end-consumer would be preferred.  With any sales tax, the burden fell on the individual consumer, and the sales tax on services was seen as an extension of an existing tax.  Mr. Fields stated emphatically it was not a new broad based-business tax.  It did not provide that critical third leg of the “stool,” nor did it provide the stability essential to fund state government. 

 

Continuing, Mr. Fields stated the Task Force had concluded that a sales tax on services would “ebb and flow” with consumer purchases.  Across the nation, 48 of the 50 states, plus the District of Columbia, had adopted a broad-based business tax long ago.  Those taxes ranged from a traditional corporate income tax in Alabama to the business and occupation tax in Washington.  Nevada should first focus on a broad-based business tax and then, if the need was evident, it should consider a sales tax on services.  The latter should not be the first action.

 

Mr. Fields acknowledged that his organization recognized the growing role of services in the Nevada economy; however, he understood that most states found it very challenging to find a way to extend sales tax to services.  Compliance would be very difficult to achieve, and there were significant apportionment issues that had not been addressed.  In states that had attempted to tax those services provided by out-of-state companies, it was discovered that collection was very difficult.  It only created an incentive for consumers to purchase services, for example, tax preparation, from out-of-state providers.  Mr. Fields questioned the wisdom of ignoring the lessons of other states. 

 

Regarding implementation, Mr. Fields stated the sales tax on services would create an entire new class of tax collectors, not taxpayers.  Large sectors of the Nevada business community would escape direct taxation under the proposed sales tax on services.  Most businesses would restructure their pricing in order to pass that cost through to individual consumers. 

 

Continuing, Mr. Fields reiterated that mining was just one of three sectors that paid an industry-specific tax.  If the sales tax on services were enacted, it would create a way for the other sectors to transfer taxes to those industries that were already paying the industry-specific taxes.  It would likely cause some businesses, including large mines, to look at providing those services internally, as well as to look outside of Nevada for services.  Mr. Fields stated that, in 2001, the mining industry paid $48.3 million in sales taxes.  Mining, as a producer of a commodity, had to fully absorb those costs, and they could not be passed through to anybody else.  The price of gold was established in worldwide marketplaces.  As such, the mining industry in Nevada could exercise no control over price, only over costs.  The same was true for ranching and the agricultural-based communities of Nevada.  Adding burdensome taxes to the bottom line of commodity-based businesses, for example, mining, unfairly increased the cost of doing business in Nevada.

 

More alarming than the sales tax on services, according to Mr. Fields, was the overall shift of the tax burden to businesses and individuals.  Historically, sales and use taxes had proven to be regressive, and they adversely affected households with lower incomes and smaller businesses.  It would be unfair to burden those groups with the services tax, especially at a time when other businesses in Nevada continued to grow at a phenomenal rate. 

 

Michael Brown, representing the Barrick Gold Corporation, commenced testimony in opposition to the proposed sales tax on services.  In the 1980s, Mr. Brown explained he had worked with the Treasury Department when two major tax bills had been approved.  He recalled his office studied the concept of a national sales tax to help fill the federal budget deficits.  Mr. Brown stated there were two principal reasons for avoiding that solution.  The first reason was that the Treasury Department generally viewed taxing authority as a prerogative of the states.  The second reason was that sales tax was viewed as a regressive tax.  Unlike the personal income tax, it was not graduated, and there were no exemptions for lower income families.  There was no earned-income tax credit available, and, after 1986, sales taxes were no longer deductible. 

 

Upon hearing the testimony of previous witnesses, Mr. Brown voiced his concern that a member of the Chamber of Commerce declared all taxes to be regressive.  Clearly, sales taxes had a much higher regressivity than did personal income tax.  Additionally, in reviewing the Chamber of Commerce proposal, Mr. Brown was reminded of his earlier federal experience and a concept called the “Laffer Curve.”  The idea was to cut tax rates, thereby stimulating economic development that would lead to higher tax collections because of that growth.  That was followed by an increase in defense spending.  Mr. Brown stated the end result was a failure that worsened the federal budget deficit.

 

Based on that experience, Mr. Brown was shocked when he heard testimony on a proposal to reduce the sales tax from 7 percent to 5 percent, since the sales tax was the only functioning tax in Nevada.  He cautioned the Committee on whether that was a gamble they wanted to take.  Mr. Brown recalled in 1981, when the new tax package was drafted, Majority Leader Howard Baker called it a “riverboat gamble.”  Before he was Vice President, George Bush called it “voodoo economics.”

 

Concluding, Mr. Brown stated the state of Nevada was facing its worst fiscal crisis since the Depression of the 1930s.  Implementing a sales tax on services was largely untested across the United States, and it had led to repeal in some states that passed that legislation.  He called attention to a book entitled, “The U.S. Master Sales and Use Tax Guide.”  He could not find any example of something as expansive as the proposed services tax.  He cautioned the Committee against reducing the single working source of funding in Nevada.

 

As he reviewed the Chamber of Commerce proposal, Mr. Brown found contradictions that could not be reconciled.  He illustrated his viewpoint with several examples, the first being the preparation of his tax return by H&R Block.  He assumed H&R’s service would be taxed; however, the television advertising utilized by H&R Block to lure him as a client would not be taxed.  If a relative died, the funeral would not be taxed, but the probate proceedings would be taxed.  A health club membership would be taxed, but liposuction would not be taxed.  Management consulting would be taxed, but advertising services would be untaxed.  Buying real estate would be taxed, but perhaps building a new home would be untaxed.  Landscape maintenance would be a taxable service, but the initial landscape installation during construction would be untaxed. 

 

Mr. Brown reiterated his serious concern with the proposal.  He recalled his mentor, a Congressman from the 17^th District of Ohio, who had commented, “Deep down inside he is kind of shallow.”  Mr. Brown was reminded of that quote as he read the proposal of the Chamber of Commerce.  He acknowledged the efforts of the Chamber; however, the fiscal crisis in Nevada would be better met by the Governor’s proposal.

 

Assemblywoman Gibbons asked Mr. Brown if he would share information on the amount of taxes paid by Barrick Gold.  Mr. Brown replied that his corporation paid a lot in taxes, and he estimated that to be approximately $14 million in sales taxes.  Barrick purchased $180 million worth of products, services, and equipment to run the mine, with $60 million tied directly to electric utility charges.  Net proceeds were approximately $5 million, although utility rates had eroded that figure last year.  On average, Barrick paid $9,000 in taxes per employee.  That included property taxes.

 

Assemblywoman Gibbons requested his opinion on what Barrick would pay under the new proposed gross receipts tax (GRT).  Mr. Brown estimated that his company would first look at gross proceeds from the sale of gold, would subtract taxes on net proceeds, and ultimately would be looking at an estimate of $2 million. 

 

Assemblyman Goldwater predicted that companies would have to pay a service tax in order to hire a lawyer to challenge the interpretation of the new law on the services tax.  Mr. Brown reiterated his industry’s willingness to step forward and pay a broad-based business tax.

 

Scott MacKenzie, Executive Director, State of Nevada Employees Association (SNEA), Local 4041, commenced testimony in opposition to the sales tax on services.  The SNEA General Council, the governing body of SNEA, had met and issued a resolution in support of the Governor’s broad-based business tax.  That resolution would be presented to the Governor on the following day.  Mr. MacKenzie was aware state employees understood the need for new taxes; however, state employees’ salaries had lagged by 18 percent and, with the new raise for Clark County, the lag was as much as 24 percent.  For the Department of Corrections, the lag was 45 percent compared to city, county, and private sector workers.  Until the recent cut in the health insurance, benefits had a lag of 29 percent compared to city, county, and private sectors.  Over the last five years, there had been a loss of approximately 1,500 state jobs.  The need for new taxes was more than apparent.  Mr. MacKenzie reiterated the SNEA General Council support of the broad-based business tax, as proposed by Governor Guinn, and SNEA’s opposition to the services tax. 

 

Chairman Parks called for additional witnesses.  Assemblyman Anderson interrupted and stated, “With all due respect to the people who have all been here for four hours listening to this, I do not think we should continue to listen to this discussion relative to this particular tax.”  Assemblyman Anderson acknowledged there were some ideas that had merit; however, he thought it might be appropriate to make a motion for “no further consideration.”  It was a proposal that could be raised at a later date, but it was apparent from all of the testimony that the “little guy” would be hurt by the services tax.  Assemblyman Anderson stated he had made his decision, and he reiterated his offer of a motion to the Chairman. 

 

Chairman Parks acknowledged the offer and, with the exception of Carole Vilardo, all testimony had been received.  He called for comments from the Committee.

 

Assemblyman Griffin agreed that he had concerns with the services tax proposal.  He acknowledged the work of Mr. McMullen’s Business Representatives Group.  Assemblyman Griffin offered the example of a constituent who owned an awning installation business, a service-oriented company that grossed approximately $800,000 per year.  That businessman communicated via e-mail with Assemblyman Griffin that the services tax was not agreeable for his business.  In his words, the businessman stated, “If I thought my customers could pay another 5 percent, I would have gotten it from them a year ago.” 

 

Continuing, Assemblyman Griffin posed the question, “Who is here for the small business?”  He said that having grown up in that atmosphere, he had that perspective as he reviewed the list of taxable services consumed by business.  There were no options for a small business, according to Assemblyman Griffin.  A small business could not hire its own certified public accountant (CPA), nor could it afford an in-house computer staff.  He was not saying that big business did not consume those services; however, he was saying that small business did not have an option of whether or not to hire a multitude of services. 

 

Concluding, Assemblyman Griffin stated that, because there were no options, the cost to do business increased.  Those added costs would be passed on to the consumer.  Citing the example of realtors, there was no other option except to provide a service.  That was the basis of the real estate business, and the services tax would not be optional. 

 

Assemblyman Griffin shared the contents of an e-mail from the Henderson Chamber of Commerce in which they indicated they were completely opposed to the sales tax on services because it was not a broad-based business tax. 

 

Assemblyman Mortenson made a brief statement of agreement with Assemblyman Anderson’s offer of a motion of “no further consideration.”

 

Assemblywoman Gibbons asked for additional testimony on how the gross receipts tax and the services tax would affect the business operations of Mr. Daigle, Mr. Whittemore, or Mr. Flint. 

 

George Flint, representing the chapel and brothel industry, offered to testify.  Mr. Flint asked to clarify earlier comments that indicated there were only three industry- specific taxes levied in the state.  When the Mustang Ranch was operating, their three locations accounted for 12 percent of the Storey County budget.  There was a potential for the brothels to be taxed an additional $2 million per year if the 5 percent services tax were adopted.  Continuing, Mr. Flint explained there were 26 brothels in the state of Nevada, and only 4 or 5 of them would have gross receipts exceeding the threshold of $450,000.  He estimated the passage of the gross receipts tax would cost them minimally $50,000 to $75,000. 

 

Assemblywoman Gibbons reiterated her request for a response from the banking industry and from Mr. Whittemore.  Chairman Parks announced the testimony had been too prolonged, and the discussion was over. 

 

Chairman Parks asked Assemblyman Anderson if he had made a formal motion.  Assemblyman Anderson stated he had suggested a motion, assuming the Chairman was willing to accept one.

 

            ASSEMBLYMAN ANDERSON MADE A MOTION FOR NO FURTHER CONSIDERATION OF THE SERVICES TAX ISSUE AT THIS MEETING.

 

Chairman Parks echoed, “at this meeting.”

 

            ASSEMBLYWOMAN PIERCE SECONDED THE MOTION.

 

Chairman Parks asked for discussion on the motion.  Assemblyman Hettrick requested clarification that the specific motion was “no further consideration of this particular topic at this meeting.”  Chairman Parks concurred.

 

            THE MOTION CARRIED. (Assemblyman Marvel was absent for the vote.)

A letter of opposition to the services tax was received from Judi Booe, representing the Nevada Alliance for Retired Americans.  It was entered into the record as Exhibit O.  A letter of opposition to the services tax was received from Scianna Augustine, representing Magistra LLC.  It was entered into the record as Exhibit P.

 

The meeting was adjourned at 6:05 p.m.

 

 

 

 

 

 

 

RESPECTFULLY SUBMITTED:

 

 

 

                                                           

June Rigsby

Committee Secretary

 

 

APPROVED BY:

 

 

 

                                                                                         

Assemblyman David Parks, Chairman

 

 

DATE: