MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
May 1, 2003
The Committee on Taxationwas called to order at 1:42 p.m., on Thursday, May 1, 2003. Chairman David Parks presided in Room 3142 of the Legislative Building, Carson City, Nevada, and via simultaneous videoconference, in Room 4406 of the Grant Sawyer State Office Building, Las Vegas, 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.
Note: These minutes are compiled in the modified verbatim style. Bracketed material indicates language used to clarify and further describe testimony. Actions of the Committee are presented in the traditional legislative style.
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:
Speaker Richard Perkins, Clark County Assembly District No. 23
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
June Rigsby, Committee Secretary
OTHERS PRESENT:
Paul Misener, Vice President, Global Public Policy, Amazon.com, Inc.
George Flint, representing Brothels and Wedding Chapels
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
Chuck Chinnock, Executive Director, Nevada Department of Taxation
Karen Pearl, Executive Director, Nevada Telecommunications Association
Carole Vilardo, representing the Nevada Taxpayers Association
Larry Osborne, Director, Carson City Area Chamber of Commerce
John Satterfield, Citizen
Janine Hansen, President, Nevada Eagle Forum
John Wagner, representing the Burke Consortium of Carson City
Grant Hudlow, Citizen
Jim Endres, Cal-Neva Franchise Owners Association
Richard Rose, President, Cal-Neva Franchise Owners Association; and representing the 7-Eleven Franchise Owners Association of Southern Nevada
Sally Devlin, Citizen, Pahrump, Nevada
Peter Krueger, Nevada Petroleum Marketers and Convenience Store Association
Art Hinckley, representing Berry-Hinckley Industries
Dennis Sponer, President, ScripNet
David Schumann, representing the Nevada Committee for Full Statehood
Eric Jenson, Executive Marketing Director, World Financial Group
Dan Meyer, Gaming Route Operator, Comstock Games, Incorporated
David Rund, President, Taiyo America, Incorporated
William Freed, Citizen
Doug Busselman, Executive Vice President, Nevada Farm Bureau
Ray Bacon, representing the Nevada Manufacturers Association
Chairman Parks:
Good afternoon. I’d like to call the Committee on Taxation to order. [Roll taken.] Please mark the other members present as they arrive.
Assembly Bill 281: Imposes and increases certain taxes and fees and makes various changes to provide additional state revenue and to stabilize revenue base of state. (BDR 32-756)
This afternoon we’re going to continue our review of Assembly Bill 281 and discuss the various areas. Today we’re going to concentrate on the gross receipts tax. However, before we start with that presentation, I wanted to offer a couple of individuals who were cut short at our last hearing the opportunity to finish their comments.
The first person we have is Mr. Paul Misener, Vice President for Global Public Policy with Amazon.com. Mr. Misener was requested to speak here today by Assemblyman Grady.
Paul Misener, Vice President, Global Public Policy, Amazon.com, Inc.:
Thank you for inviting me to testify this afternoon and for addressing this very important topic, as it’s something of particular importance to Amazon.com. I thought it might be helpful to you and your Committee if I told you a little about Amazon, the company, and its presence here in Nevada.
Amazon is not even a decade old. It started on my boss’s garage floor and has now grown to be the world’s largest online retailer. We have revenues on the order of $4 billion a year. We have climbed into the Fortune 500 and are doing quite well on the revenue side of things. We still have our issues on the profit side of things and, hopefully, will be working through those in the near future.
It may not be obvious why a company like ours has grown so quickly on the revenue side but has faltered, at least until very recently, on the profit side. The reason is actually fairly simple when it’s explained. A company like ours is a very high fixed-cost, very low marginal cost business, unlike the traditional brick-and-mortar retailers who build a store for a couple of million dollars, or maybe a few hundred thousand dollars, and serve a small community. They have relatively small start-up costs, fairly small fixed costs, but when they go to serve another community they have to build a whole new store. They have to start all over again, so they have very high marginal costs.
We’re exactly the opposite. It took billions of dollars to establish a worldwide Web site presence as well as the fulfillment centers necessary to serve our customers. Behind the scenes at Amazon.com there is a huge infrastructure that was very costly to develop, as well as many employees.
[Mr. Misener, continued.] Here in the state of Nevada, we have one of our largest fulfillment centers in Fernley. It has 850,000 square feet of fulfillment space. Not far away is another one in Stead, which has roughly 400,000 square feet. These facilities employ 850 people year-round and another 1,000 or so during our peak season, which is the fourth quarter of the year. We are very proud of the facilities here as we are of our facilities elsewhere around the country. We have similar facilities in Kentucky, Kansas, North Dakota, and Delaware. We have closed facilities in Seattle and Georgia, largely because of their local business economic climates. We take this very seriously. We’re very much aware of business climates, including tax policies, of the states in which we’re resident and those affect our decisions, but not on a global scale. I won’t tell you that if an inimical tax were passed here in Nevada we would shutter our facility in Fernley. That’s not the case, certainly not within any reasonable period of time. However, as we grow and expand our facilities we have choices that face us almost weekly, and certainly monthly, about how we allocate our resources around the country. Those choices are affected dramatically by local legislative policies.
We currently have facilities around the country and we have the opportunity to grow or shrink or maintain our bases in each of those states. We do pay attention to things like the proposal at issue today. I’m sure you’ve heard a lot of testimony on this in the past couple of months. I’ll just add how it affects a company like Amazon.com in particular. I mentioned before that companies like ours have high fixed costs, low marginal costs, and very high start-up costs. That kind of a business circumstance causes a gross receipts tax to hurt us more than it does the average company simply because our revenues precede our profits by a number of years. This is going to be the case with any high- tech kind of concern, be it pharmaceuticals or software development, where it costs a lot of money before you can make your first dollar. The first several years of making money on the revenue side, the top line, do not go rewarded on the bottom line because you’re still paying off the investment costs.
We are very mindful of the pressures you face in running the government here in Carson City and we’re not unaware of the difficulties that you face. We feel strongly, however, that the gross receipts tax is perhaps the worst way to address it, certainly for companies like ours and others, including my colleagues at Microsoft, who would have joined us today except for scheduling conflicts. They have 300 employees near us in Reno. They also would be hurt very much by a gross receipts tax and they, perhaps less so than we, have more flexibility to move in and out of the state given that they don’t have the physical attachments that we have.
Assemblyman Mortenson:
Didn’t you declare a profit recently?
Paul Misener:
We have shown a profit in the fourth quarters of the two most recent years. We have not shown enough of a profit to overcome the losses in the preceding three quarters. We’ve not yet achieved year-over-year profits in these tough times.
Assemblyman Mortenson:
You have the most fabulous Web site. There’s no end to its depth, and your marketing is fabulous.
Assemblywoman Gibbons:
We’re happy to have you here in Nevada. As you know, this bill came from the Task Force and it’s only a proposal. We realize there are some problems with the gross receipts tax, and that it’s not a “one-size-fits-all” tax. We’ve looked at other methods, such as subtraction of expenses. We’ve even looked at service taxes. In talking to other businesses, banks don’t fit into the gross receipts scenario, nor do grocery stores, car dealers, Amazon, or Microsoft.
Unless we go after citizens and raise property taxes, which personally I don’t want to do, the only entities we can really look to for revenue are businesses. So many businesses haven’t been paying in Nevada, but we don’t want to scare you away. Are you willing to work with us and come up with a plan that you can live with? I’m sure you probably pay business taxes in other states. We want to make Nevada a good place for you to do business. If the gross receipts tax isn’t possible, then I think we’re ready to put our heads together and work with you and find something that can work for everyone.
Paul Misener:
Mrs. Gibbons, your remarks are taken to heart. Our Amazon family in Nevada is concerned about services here as well. We’d love to continue the excellent schools and the local services that we have. We’re not unaware of the needs of the state, but we are paying taxes. You must have recognized that businesses like ours do pay taxes. We pay, in personal property tax alone, on the order of $800,000 a year. We pay a similar amount in real property taxes, and then you add on things like the head count tax, which is the business activity tax per employee, per quarter. We do pay taxes. I’ve seen studies here that indicate that the non-gaming business community pays on the order of 80 percent, if not more, of the state’s revenues. The non-gaming businesses here, like Amazon.com, are paying a lot, and are paying our fair share. To the extent that this isn’t enough, the combined revenues of gaming and non-gaming, the 20 percent they pay and the 80 percent we pay, if that proves inadequate we, frankly, would caution or counsel fiscal moderation. We face tough times; we face our investors. We must be mindful of the business environment and the economy when we make business decisions and we would ask that you do the same.
[Mr. Misener, continued.] If the state truly cannot cut any more—and I’m not convinced we have reached that point, perhaps I don’t know enough about the local economy and the government’s needs—what we have said is that a top-line tax makes no sense for the state or for businesses like ours. Perhaps a bottom-line tax makes more sense. It’s a relative thing, though. We would ask that you do the best you can to be fiscally moderate in these tough times. If necessary, some kind of a bottom-line approach would be preferable to the top-line approach.
Assemblywoman Gibbons:
Thank you. We appreciate your comments. I want to assure you that we have been cutting and we continue to do so. Maybe we won’t have to do this, but if we do, we have to work together and find something that’s suitable. Being from northern Nevada, we don’t see the need, but the southern part of the state has grown so much that it’s been almost impossible to keep up with the growth and the need for services. I’ve been astounded this year because I just don’t see it in the north.
Paul Misener:
I appreciate that very much. Washington state is our headquarters. We have a long experience and history with a gross receipts tax, the Washington state business and occupation (B&O) tax. We have to corporately chuckle when it’s held up as an example and as a good kind of tax scenario. It isn’t. It’s fraught with problems, especially for new economy companies. The administrative burden on Washington state’s Department of Revenue is enormous. Getting it right is very difficult, especially for businesses that are trans-state. If you have a single transaction that uses resources, be they employees or fiscal input from around the country, just trying to apportion what amount is part of the gross receipts tax base, the B&O tax base in Washington state, is extraordinarily difficult. That’s just a last thought on why, in our view, the gross receipts tax is not a panacea and would be the wrong thing for Nevada.
Assemblyman Goldwater:
I was a stockbroker when Amazon first went public and I always get a kick out of their presence in Nevada because, if you recall at the time, their new business model was connecting the manufacturer with the consumer—no inventories, no warehouses. Then in Nevada you put in multi-square feet of warehousing and inventories.
[Assemblyman Goldwater, continued.] We did the streamlined sales tax. You also were supposed to have been a payer of sales tax. We’ve had a very difficult time with your company at the Department of Taxation. I know I’m shown several times nexus of the credit card holder, nexus on delivery, nexus in the state of Nevada, yet no sales tax is collected, and we do have the streamlined sales tax. Are you supportive of the streamlined sales tax? My second question concerns gross receipts and your ability to incorporate that in your pricing. Were you able to do it in Washington state? How would it be incorporated into your pricing, or would it be done elsewhere and absorbed elsewhere in your business?
Paul Misener:
I’ll answer your second question first. The way we handled it in Washington was to close our fulfillment center. We handled it the same way in Georgia.
On the streamlined sales tax project, we’ve been very involved from the beginning. We were one of the two private sector representatives from Washington state on the project and have dedicated a number of individuals in the company to addressing this thorny issue of sales tax across the country. As you know, there’s a decade-old U.S. Supreme Court decision, which follows on one that’s 34 years old. It basically said that the current sales and use tax system in the country is unconstitutionally burdensome on remote sellers. Therefore, remote sellers cannot be compelled to collect a sales tax from a customer in a state unless they have some sort of a physical nexus, a presence, there.
We do remit sales tax to Carson City on sales to residents of Nevada so we have some experience with that. You’re right; it is difficult. It often is more difficult figuring where to send the sales tax than it is to figure out how to calculate it or how to collect it. That is to say, what rate and what jurisdiction a person lives in. We have never taken the position that taxation should not apply to remote sales, including Internet sales. However, we do feel very strongly about this more than 230-year-old commerce clause protection, which protects out-of-state entities from burdensome regulation by other states. Once we get beyond the point where it is no longer this unconstitutional burden, our business model is not predicated on the non-collection of tax. We’ll do just fine but we have to get to that point.
There are some 7,600 taxing jurisdictions in this country. They’re not just counties and cities which are easy to define, they’re mosquito abatement districts and such that are quite difficult for an out-of-stater to figure out. Brick-and-mortar stores aren’t faced with that kind of complexity. They don’t have to know where their customers actually live; they only have to know where their store is. A customer coming into a Wal-Mart, for example, is not asked what district he lives in or whether he lives in a mosquito abatement district, a particular school district, county, or township. Once we get to the point where it is simple, we’ll be fine.
Assemblyman Grady:
I would like to thank Mr. Misener for being here. He’s been spending quite a bit of time in Nevada.
Chairman Parks:
We have a presentation by Mr. Hobbs and Mr. Aguero, but before we do that I’d like to ask Mr. Flint to come forward. We cut him short on what he was trying to say at our last meeting, so I’d like to give him a couple of minutes to finish his remarks.
George Flint, representing Brothels and Wedding Chapels:
When these tax bills began to surface, I turned each one of them over, and on the back page is a little area that seems pretty innocuous, “Text of repealed sections.” A.B. 281, for all practical purposes, makes every single independent contractor/sole proprietor subject to no longer being exempt from the sole proprietorship exemption that has existed for many years.
I made a laundry list of those people or those businesses that would be affected by this repeal. I won’t burden you with the whole list but it certainly would affect those 1,250 Avon ladies who were discussed very briefly at Tuesday’s meeting by the lady who sat before you, as well as the two other gentlemen representing the direct sale business. It would also affect the Mary Kay people, the Amway people, and the young men who come to mow the lawn at my wedding chapel every Thursday. It would affect paperboys, ministers who work independently in wedding chapels in Las Vegas, and those people who subsidize their income with an occasional garage sale. It would certainly affect, as Ms. McClain pointed out the other day, the ladies who work as independent contractors in the beauty shops and salons in Las Vegas. It would certainly affect, as Mr. Mortenson pointed out, those of us who have one-man corporations. It would even affect us lobbyists. It would certainly affect struggling artists and it would probably affect about 30,000 exotic dancers in this state. By the way, Club Jaguar in Las Vegas recently sent out a request for applicants and they got 13,000 applicants for 1,000 potential jobs.
[Mr. Flint, continued.] I’m always embarrassed to bring up my client, but it also would have a dramatic effect on the 1,000 or so women who work in the state of Nevada as legal prostitutes. I think it would be counterproductive for the state to attempt to put all of those people under the state business license and certainly the state activity tax. One of the reasons I’m concerned for the women who work in my client’s industry is that many of them only come to the state once a year for two or three weeks. Many of them only work during the summer time when their kids are out of school. Many of them only work part-time to subsidize their family’s income, as do the Mary Kay women and the Avon ladies.
I would appeal to this Committee to take a long hard look at repealing the exemption on single employee/sole proprietorship business people. I started out 63 years ago selling something called Sloan’s Liniment door to door. I graduated all the way up to being a paperboy. I eventually became quite an entrepreneur, selling produce out of my dad’s garden when he was away and couldn’t watch me. I made some pretty good money. The state of Nevada is full of young people and older folks who are dedicated to subsidizing their family income by being small sole proprietors and independent contractors.
It so happens that the women my client hires are those who would be terribly impacted by this repeal. These ladies already pay up to $500 a year to local government for the privilege of working legally and they pay up to $100 a week to local physicians for the medical agenda that is placed upon them to work legally. Many of them have personally told me that, if they have to deal with two more taxes, it could be the straw that would break the camel’s back, and they might just decide it’s easier to work on Fourth Street in Reno or the Strip in Las Vegas. I don’t like to use that as an argument because that’s repugnant to me, and I’m sure it would be to you, too.
There’s an 80-year-old lady who lives down the street from me named Lupe Martinez. She sells homemade tortillas up and down the street. In order for her to be in compliance, if this repeal happened, she would have to pay $300 a year for the business activity tax and $100 a year for a business license. Ms. Martinez told me she makes about $100 a month. She’d be paying 40 percent of her total income to comply with the law. I know another lady who makes wonderful little knishes. She sells them by the dozen to her friends and neighbors. She would no longer be exempt from the sole proprietor exemption of these chapters.
As you make your decisions on these various areas, please continue to show concern for the little people. Please continue to hold that position because, even though I’m highly concerned for a particular segment that is represented by my client, this state is packed with little people. Mr. Chinnock referred to 60,000 or 70,000 more people who would be brought into the tax structure. I don’t think we want to do things to discourage people from making those few extra dollars that allows them to live just a little better than they would with just a single income in their family.
Chairman Parks:
We’re going to bring this topic up next Tuesday, May 6 for those who are interested. This is certainly going to be one of the primary topics that we discuss at that time.
We’ll move forward to discuss the gross receipts tax. I’ve asked Mr. Hobbs and Mr. Aguero to join us. We were going to have a PowerPoint presentation, but, as this room is rather small, we’re going to have look at the exhibits as they’re handed out and discussed.
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy in Nevada:
We previously had an opportunity to address you in a joint session with your Senate colleagues regarding the recommendations that were made as a part of the process of the Governor’s Task Force on Tax Policy. Just this past week we had an opportunity to address you and answer somequestions with regard to some of those recommendations. Today we’ll be focusing more upon a specific recommendation.
I wanted to cover some ground to help set the topic up a little bit. Early in our deliberations we were required by A.C.R. 1 of the 17th Special Session to identify various taxes we would review as a part of this process. That was done concurrently with an assessment of the state’s needs. I will remind everyone that, because we hear a lot of testimony and discussion about what individual revenue sources or tax proposals might do to individual businesses, we wouldn’t be talking about any of this had the analysis that we performed not convinced us and borne out the fact that, going into the next biennium, we expected there to be in excess of a $700 million shortfall to fund existing programs. Obviously, we would not be talking about any of these very difficult issues if not for the existence of that particular problem.
The Task Force was required to develop one or more proposals to carry out the state’s need to provide additional revenue for state programs, help stabilize the existing tax base, and help reduce the identified gap between revenues and expenditures over time. That was done in direct association with the projected shortfall that had been identified as part of the analytical work product of the committee. The lack of stability is one of things that contributed to the shortfall that we’re dealing with. A.C.R. 1 of the 17th Special Session also required that any recommended legislation include a plan to broaden the tax base so to make it more reflective of the diversity of our economy within the state.
[Mr. Hobbs, continued.] The next two pages in your packet (Exhibit C) show an analysis of some of the taxes that were identified as a part of our process of finding potential mitigation for the funding gap and were considered prior to us making our recommendations. We tried to look at a wide variety of taxes, some—involving the type of application that we’re discussing today—more focused toward the business community, and some involving other areas of taxation, some of which we already participated in and some of which we did not.
At the end of our process we attempted to make a recommendation to try to satisfy multiple objectives. In talking about new revenue sources that might require time to prepare implementation plans, the ability to gather revenue quickly might be questionable. We had to give consideration to near-term cash flow issues that the state would be facing. Our analysis indicated that over the next biennium, which would begin this July 1, there would be a shortfall of revenues versus the level of expenditures necessary to sustain existing programs. We were aware that part of what we had to do was provide some near-term cash flow to address part of that near-term shortfall. Another very important part, which is reflected in the Task Force’s report, was to identify some things that could be done to make the existing collection of revenues not currently provided for in statute more efficient.
The third, longer-term part of our task dealt with identifying revenue sources, whether currently existing or not, that could help deal with the revenue shortfall that we expected to face, deal with the objectives of A.C.R. 1 of the 17th Special Session, help the overall revenue mix to better reflect the diversity of the state’s economy, and also provide that much needed boost for the stability side of the equation. We attempted to satisfy all of those objectives at the same time, which led us to a multi-part recommendation that included adjusting some existing revenue sources for inflation. Those sources include cigarette taxes, liquor tax, business license tax, and others that had not been adjusted for inflation for some lengthy period of time. We discussed those as well as some new sources of revenue that didn’t have existing collection infrastructures in place. We tried to identify those that would best lend themselves to being collectible as quickly as possible with the least amount of cost.
Assemblyman Marvel:
Have you people considered getting into the Rainy Day Fund to take care of the shortfall for this fiscal year?
Guy Hobbs:
When we were doing this analysis, which ended last November, we were uncertain how much of the Rainy Day Fund would be drawn down, so we didn’t deal directly with the Rainy Day Fund.
Assemblyman Marvel:
What number are you dealing with as far as a shortfall?
Guy Hobbs:
We anticipate a gap between revenues and expenditures of $250 million for the current biennium.
Mr. Chairman, with your permission, I will go over a description of the gross receipts tax included in the Governor’s Task Force bill. Since this last fall, we have been asked a number of questions about a gross receipts tax and its mechanics and application. For the presentation today, we have taken those questions that have been most frequently asked of us and included those in your packet (Exhibit C). If it would serve your purpose we could address some of the more frequently asked questions, which I’m sure have also been asked of you.
Chairman Parks:
That’s fine; please proceed.
Guy Hobbs:
There are two bills that have included the gross receipts tax—the one from the Governor’s Task Force, which is before you at this time; and another bill put forth by the Governor’s Office, which also includes a version of the gross receipts tax but has some features that are different from those included in ours. I hope that, in going through a description of the gross receipts taxes included in this particular bill, we don’t create more confusion. Hopefully, we’ll eliminate some confusion about differences between the versions that people may have heard about in the past.
One thing common to both proposals is the size of the levy—one quarter of 1 percent of all the gross receipts of business activity within the state of Nevada. In the Governor’s Task Force bill we recommended a $350,000 standard deduction, or threshold deduction, for business activity under which the gross receipts tax would not apply. The first $350,000 of activity would not be subject to the tax. This, we felt, would increase the equity of the overall system and would exempt roughly half of the businesses. In the Governor’s bill, which included a $450,000 threshold, roughly 60 percent of the businesses would be exempt from application of the tax.
[Mr. Hobbs, continued.] We also included something that was different from the Governor’s bill, and that was a tax credit for qualified Nevada employees. As a part of the process we went through, we looked at both the business license tax and the gross receipts tax, and it occurred to us that combining the two taxes into a single tax system might make good sense. As I mentioned earlier, we were making adjustments to a lot of the unit-based taxes that had pre-existed but hadn’t been adjusted for some time. The business license tax was one of those we looked at. The $100 per employee had been put into place many years ago and hasn’t been adjusted since. The amount of inflation that has occurred since that time is roughly 40 percent, so the Task Force recommended an increase from $100 per employee to $140 per employee. That would be paid by all businesses in the state regardless of size.
Against whatever obligation there might be under the gross receipts levy, we were suggesting that a credit be given back to those businesses that had a tax liability under gross receipts. In other words, those that had receipts in excess of $350,000, or $450,000 under the Governor’s proposal, would be allowed to take a credit of $100 per employee against their tax liability. That’s a significant difference between the mechanics of the Governor’s bill and our bill.
One important point is that all businesses, both under the $350,000 threshold and over the $350,000 threshold, would be participating and helping raise the revenue necessary to provide the services. A business whose gross receipts were under $350,000 would pay the $140 per employee business license tax, since it would have no gross receipts liability. Under the $350,000 threshold, a business would not be receiving a credit, so its participation would be by way of that additional $40 per employee above what’s currently being paid. Those businesses with gross receipts over $350,000 would be subject to the gross receipts liability with an offsetting credit for the number of employees they had.
Assemblywoman Gibbons:
When you were working on this, did you envision how this would affect babysitters and kids with lemonade stands?
Guy Hobbs:
We certainly had discussion about sole proprietors, because we recommended the inclusion of sole proprietors. We have those kinds of activities occurring today—mowing lawns, babysitting, those things that, I suppose, by the most literal interpretation, would be subject to other forms of federal tax as well. It’s a matter of compliance. We presumed that most of those would actually be complying.
I’d like to talk about the process we went through that led us to this particular part of the discussion. Once we had identified the funding gap, the next order of business for us was to try to do a number of things at the same time. The first thing was to fill that gap and the second was, in filling the gap, to try to do something that would add stability to the revenue system as well as more diversity to the revenue system over time. As a consequence, we first looked at existing sources of revenue and some that could be more easily adjusted to reduce the funding gap prior to having the more focused discussion as to how to deal with matching those adjustments against the diversity requirement that A.C.R. 1 of the 17th Special Session had given to us. By the time we got to discussing a broader based business tax, we had done much work to try to net the problem down so as not to put the full load of the problem on the business tax. We thought that was an important point. Most of us were aware that a mixture of different sources of revenue would likely be best, not trying to pin it all on one particular revenue source, especially one that hadn’t yet been time-tested within our revenue structure.
We were looking for something that could be imposed with relative ease. There’ll be some discussion about how easy it is to impose a new tax and administer it very quickly and how costly that may be and other questions that have been raised to us. In our judgment the gross receipts tax was, in comparison to a margin-based tax, a value-added tax, or a net profits tax, the easiest one to create a collection infrastructure for and to administer on an ongoing basis.
We tried to identify sensible things, from a business standpoint, that could be included as either credits against this particular tax, deductions from the income upon which the tax would be based, or exemptions from the tax. For example, membership dues, fees, or fundraising activities of not-for-profit corporations; operating revenues of public utilities; and revenues upon which gross gaming tax was paid would be exempted from the tax. That’s one question we’ve been asked frequently. As a companion to the recommendation for consideration of a gross receipts tax, we also made a recommendation for a 0.25 percent increase in the existing gross gaming tax, with full application of the recommended quarter percent gross receipts tax to the non-gaming components of the hotel/casino industry. Exempting gaming revenue from the gross receipts tax did not necessarily mean that there was an exemption for that particular industry, but from a mechanical standpoint, it had to be dealt with in a different way because of pre-existing taxes on gaming activity.
Our recommendation includes deductions for revenue constitutionally prohibited from being taxed, such as state, local, and federal fuel taxes collected by certain vendors and then passed along to the ultimate recipient of the tax revenue; interest income on municipal bonds, which, by its very nature, is tax exempt; and pass-through revenue. We’ll get to more discussion about the definition of pass-through revenue as this presentation continues but, generally speaking, it’s revenue received where the product or service being passed through isn’t necessarily owned by the person who is passing it through. It’s more of a brokered or consigned business relationship.
[Mr. Hobbs, continued.] Other deductions include dividends paid by a subsidiary to a parent corporation; cash discounts allowed to purchasers; bad debts; receipt of counterfeit money; income from governmental sources received by hospitals, such as Medicare and Medicaid; and health and life insurance claims paid to a business for some sort of loss.
Since November we’ve frequently been asked how this might work. Certain questions have been asked frequently enough that explaining some of this today by posing those questions and walking through the answers might be expedient.
One of the first questions that gets asked is, “What is the definition of gross receipts?” A related question is, “If I’m a business that operates on a cash basis, how will I have to deal with receivables and vice versa?” I’d like to try to answer both of those. The answer is largely posed within the question itself. Except as otherwise provided in the section, gross receipts means the gross amount received or receivable in the use, sale, or exchange of property or capital, or for the performance of services from any transaction involving a business. If someone has elected already, for purposes of their federal tax filing, to be on a cash basis or an accrual basis, there would be no change. It’s an election already made, so no change would be required. That allows us to conform better to elections made for federal income tax reporting purposes.
Another question that we’re quite often asked is, “What factors led the Task Force to recommend a gross receipts tax as opposed to a net profits or value added tax?” If you look at certain attributes that go back to A.C.R. 1 of the 17th Special Session, which also reflects the nature of the problem we’re trying to address, stability is something that the Task Force felt should be valued at a substantial premium. Most of you have seen or heard information about the states that have relied heavily on net profits tax over the past several years and what the revenue performance in those states has been. The ability of those states to rely on that particular income as a percentage of their budget has dwindled considerably. The percentage of overall state budget funded by revenue from a net profits tax has dropped substantially in most states in the past few years. In other words, the net profits tax is producing less revenue.
We’ve seen an average of 20 percent reductions in revenue because of the instability of a net profits tax, with the reduction as high as 50 percent in some states. The stability of a net profits-based form of tax is something that concerned us a tremendous amount. Predictability depends a lot on stability. Over time, gross receipts activity tends to be more stable than profit activity, so it tends to be more predictable and a better basis upon which to predicate budgets. Gross revenues appear as Item 1A on the various tax forms, so it’s a very simple item to identify.
Assemblyman Hettrick:
I understand the A.C.R. 1 of the 17th Special Session directive was for the Task Force to develop a stable tax, and I understand the explanation you just gave in regard to a net profits tax, but the very thing you considered a problem, I consider to be the opposite side of the problem. What you’re saying here is that government should have its revenue no matter what. If a company has declining profits because the economy’s bad or something else happens to the company, it doesn’t matter. Government should get its money and have the ability to spend no matter what, and business should pay, and everybody else should pay, even the independent contractors and sole proprietors should pay, whether they make a dollar or not. That is one of my very major contentions with this tax that I disagree with.
Offering a credit back for the number of employees a business has makes some sense in some instances. I wouldn’t disagree with that. However, we’re not offering a credit if the employer offers health insurance. The state has to pay for indigent health insurance over and over again, yet what we’re going to do is charge a business that provides health insurance exactly the same amount as we’re going to charge a business that does not. That totally fails to reach the depth of the problem we need to address here.
On the idea of giving a credit for an employee if you go over $350,000, does that credit carry forward, or is that an annual credit you can use only that year and no other year? Second, in terms of the comment you made regarding net profits tax being harder to collect, I did some research on that before the start of the session, and the Department of Taxation is here and can comment. I believe there is an agreement with the federal government that they will share information with us. It appears to me that it would be very simple to have every company come in and say, on the net profits tax, “Here’s the back page of my federal tax return. You can verify that that’s what I reported to the feds via this transfer of information device and here’s my check for ‘XX’ percent as you require for the net profit line for my business” with almost no cost and no audit whatsoever, because the federal government would audit it. This would be a very simple method that would allow for businesses that have had either lower profits or emerging profits, as Amazon.com expressed to us. It would also allow people to write off the cost of health insurance. Could you address those questions?
Guy Hobbs:
To answer the first point that you made regarding the difference between business and government, as far as when revenues fall off and how adjustments are made, just about every viewpoint you can imagine was represented in the small group we had. There were those who felt we should be looking toward funding a more ideal quality of life for the people in Nevada, determining what it might cost to fund that, and constructing the revenue recommendations in accordance with that. I have a slightly different view about that kind of thing.
There are those who felt that part of the solution should come from a leaner governmental operation. One can make philosophical judgments at either end. What I tried to do was find some place in between as a starting point, or as a rational way to measure the problem. We chose to start with the existing services and see if we would have enough revenue in the system to continue to afford the services that we provide today. I understand people might debate that point. There are some who feel the services we provide are too rich at this point. There are others who don’t feel we provide enough service in certain areas.
Instead of trying to have either side win that argument, we thought the best way for us to present it to you would be as we did: Here’s what the existing services cost; this is the gap we apparently have as far as being able to afford those. If other policy judgments need to be made about the sufficiency or insufficiency of services, we thought this was a more appropriate venue to make that judgment than for us to try to determine that in any way, shape, or form.
I understand the comment you made. We had that viewpoint represented at the Task Force level, and we had quite contrary viewpoints. So, we chose what we thought would be the less debatable, less philosophical position against which to make the measure of how short we were as far as revenue was concerned.
As far as health insurance, that’s a very interesting point. The credit as we’ve put it in the bill for your consideration is simply figured on a per-employee basis. We did have some discussion about whether or not it might make sense to have additional criteria that might help reward good corporate citizenship within the state, and health insurance was one of those things we discussed. We brought the concept to a certain point and included it in our report for further consideration by you all.
[Mr. Hobbs, continued.] We clearly understood that, in providing the employee credit for those subject to the gross receipts tax, we reduced the total amount of revenue that would be derived from the gross receipts tax. By our estimation, the total amount of credit that would be given back to business in the form of the $100 per employee credit was about $60 million a year. It was quite substantial. We understood that and realized that, given the type of deliberations that you have, you must make all of these revenues fit in concert. You might give additional consideration to making the per-employee exemption more conservative or more liberal to match both your public policy desires and your revenue needs.
We saw some value in rewarding good corporate citizenship, but we didn’t necessarily, as a group, land on the one or two or three specific ways or items to reward. We thought there might be other types of good corporate behavior beyond health insurance, which obviously has an effect on your balance sheet or your income statement, that you may want to consider at the same time.
Would the credit carry forward? That is a good question. We viewed the credit as being taken in the year of the application of the tax based on the employment in the prior quarter, so we didn’t envision it being carried forward. If there was more credit computed than tax owed, there would not be a carry-forward of that. It would simply negate the amount of tax that you owed.
There was another point I wanted to make about the comparison between gross receipts and net income tax, and I think it addresses part of what Assemblyman Hettrick commented on. One of the things that concerned us, in addition to the stability question, was that, at the gross receipts level, there’s less accounting ingenuity that can be employed to alter or manage that value. At the net profits level, that’s not necessarily the same at all.
Depending upon what kind of corporate structure a business has, it might have the ability to extend money prior to the year-end closing of its books, whether that would be through bonuses to shareholders or whatever the case may be, to negate any amount owed. Businesses don’t have the ability to be as creative with gross receipts as they do with net profits. That was another thing that concerned us from the standpoint of equity at the gross receipts level. I understand that there are questions of equity within the entire discussion of gross receipts, but from this particular standpoint, comparing net profits to gross receipts, there’s more equal treatment of all the revenues received than creativity might otherwise provide for under a net profits regimen.
[Mr. Hobbs, continued.] Another question that comes up is, “Does a gross receipts tax reflect ability to pay?” Most of the taxes we have don’t reflect ability to pay. The business license tax obviously does not, and some have recommended more dramatic increases in business license tax than the Task Force. Business license fees, whether they be paid at a local level or a state level, are generally fixed, although some of them are a percent of gross which makes that not an uncommon, unheard of thing for us to do within the state. Property tax is based on the value of property, not necessarily on the ability to pay. Insurance premium tax, the payroll tax and the sales tax also do not take into account the ability to pay, because they are at fixed rates.
The only taxes that do reflect ability to pay are the personal income tax, which we did not give any consideration to whatsoever, and the corporate income tax. A corporate income tax would be more of a net profits tax, and we recognized some different types of problems with the net profits tax that led us back to the gross receipts tax.
Another question brought about by the discussion of this particular regimen is, “What is ‘pyramiding’?” This a problem that is unique to the gross receipts tax. Pyramiding is something that occurs when a tax is paid on a tax is paid on a tax. Another term we actually prefer is “stacking,” where you have taxes embedded within the cost structure of an item that is, again, taxed at the end of the production process, whether it be the same tax or another tax. Stacking is more all-inclusive; pyramiding is a bit more specific.
Stacking occurs when many different types of levies, including sales tax on goods and services that businesses may purchase, become part of the cost base of the items that they’re producing, and then ultimately pass through. A sales tax may be paid again at that point. Real property transfer tax may be paid again at that point, if you’re talking about the building of a home. Certain types of exactions and fees at the local level may be paid, so taxes are certainly a part of doing business. They occur in many forms and often are part of the final cost, whether through pyramiding or stacking.
To offer a comparison, at a 0.25 percent level, if some pyramiding did occur, you’d be talking about 0.25 percent on 0.25 percent, perhaps on yet another 0.25 percent. We saw the average pyramiding being in the ballpark of 2.5 to 3 times based on our analysis, which was similar to analyses in other states. If you compare it to other proposals that are being made that would potentially impose a 5 percent tax on some services that certain businesses might consume a fair amount of, you might actually be looking at a 5 percent rate on a 5 percent rate compounding, as opposed to 0.25 percent on 0.25 percent. Obviously, 5 percent is 20 times larger than 0.25 percent, so the relative amount of pyramiding that you might be talking about is substantially different under one system versus another.
[Mr. Hobbs, continued.] Another question we get quite a bit is, “Did the Task Force give any consideration to the type of impact a gross receipts tax would have upon economic development?” The simple answer to that is, “Absolutely, we did.” We clearly recognized the importance of economic development. We’ve recognized it over the course of years as many other taxes have been imposed and modified over periods of time. Economic development has always been important to us. We also clearly understand that, as far as corporate site selection or relocation decisions are concerned, there are a number of factors that come into play, several of which are generally ranked at a much higher level of importance than taxes.
The one that usually comes up at the top of people’s list, particularly if you’re talking about manufacturing and technology industries, is education and work force. “Can I actually acquire the type of work force I need within that community that has the appropriate skills and level of education to be part of our operation?” That’s a huge consideration. Infrastructure within a community or region that allows for the expedient and safe transportation of goods and services and employees to and from the work place is also important. Proximity to major markets obviously is tremendously important to companies that are particularly involved in manufacturing, warehousing, and shipping. Quality of life is also very high on the list.
The overall cost of operation, which includes several of those things noted above, also includes whether taxes are substantial enough to become a factor that might change one’s decision. We generally find that, in terms of a company’s ultimate decision concerning location, taxes occur at a much lower level of importance in the rankings than some of the other things I mentioned.
It’s also very important for the government to enable the communities and the state as a whole to provide a competitive environment by meeting some of those factors that businesses consider important. Is the education system producing an educated workforce with the type of trained talent that would help attract businesses to the area? Is the infrastructure in place that would provide what a company would view as a positive quality of life? It becomes the responsibility of government to be competitive at the state and local levels by attending to such things when competing with other states.
The broadness of the tax base—specifically the gross receipts tax, since it cuts across all types of businesses providing goods and services—allowed us to recommend an extraordinarily low rate. We wanted to be sure that, compared to other tax systems based on gross receipts, ours was the lowest effective rate. As I said earlier, we took great care in trying to pare down the net amount of problem we were dealing with to allow this to be the case. Proposing a rate that would allow us to maintain our competitive position as a low-tax state was of great importance to us.
[Mr. Hobbs, continued.] At this point I’d like to ask Jeremy Aguero, who’s been very much a part of this from the beginning, to run through a few other of these most frequently asked questions with you.
Jeremy Aguero, Chairman, Technical Advisory Committee, Governor’s Task Force on Tax Policy in Nevada:
The next question on the list is, “How does the tax burden created by the gross receipts tax compare with business taxes imposed in surrounding states?” If we look at the corporate income taxes imposed by Arizona, California, Colorado, Idaho, Montana, New Mexico, Oregon, and Utah, the lowest tax rate among them is 4.8 percent, which is the lowest bracket in the state of New Mexico. National tax rankings are important, but they can be somewhat deceiving. We see illustrations of the tax burden per capita, a great deal of which Nevada offsets to tourists who visit our state every year.
Also, very few states, if any, exempt 50 percent of all businesses from their corporate income tax. The gross receipts tax, with the $350,000 threshold, would exempt a substantial amount of Nevada businesses.
Assemblyman Marvel:
Did you consider some of the states that don’t have a sales tax? Oregon doesn’t have a sales tax.
Jeremy Aguero:
We weren’t looking at the aggregate burden imposed or the incidence of tax created by a particular state. We were just looking at the corporate income tax burden and the burden specifically directed at corporate industry.
Assemblyman Hettrick:
Jeremy, you have to at least make the comment that if you’ve got a company that’s grossing $1 million a year and is levied with a 0.25 percent gross receipts tax but has no profit, what’s the percentage of tax? It’s far more than these on your list. These are 5 percent of a net and not 0.25 percent of nothing.
Jeremy Aguero:
You are absolutely correct, and that’s certainly a very valid point. In connection with that, perhaps we should consider that in 1999, the IRS (Internal Revenue Service) released its latest report of all corporate income. There were more than $18 trillion worth of business receipts reported to the federal government nationwide. The average pretax profit margin for all those businesses was 6.5 percent. Applying our proposed gross receipts tax on a national level would equate to an effective corporate income tax rate of 3.5 percent or so. It would still be among the lowest of the surrounding states.
Assemblyman Hettrick:
I would agree with that. That’s a reasonable assumption, but the problem with that is that it’s taking the average. It’s not looking at the impact on a real business. If we take the whole national average I would expect it to come out that way, but when you look at a real business, it doesn’t. There are lots of businesses that operate on a slim profit margin.
I think the phrase Guy Hobbs was struggling for was, “Tax avoidance is perfectly legal; tax evasion is not.” You do have people who don’t deliberately avoid taxes and have losses and who don’t control every aspect of their business every single day. They don’t control pricing. Mining is one of the very good examples in this state we’re all well aware of, and the cattle business is another. They struggle with the fact that they don’t control their own prices. They could have no profit, or a loss, and still have to pay tax. That’s one of the problems with the gross receipts tax that I can’t overcome.
Guy Hobbs:
One exemption that we gave consideration to that ultimately found its way into the Governor’s bill was for agricultural products sold at wholesale. A lot of us on the Task Force felt that was something that should have been included in our particular version. It was not. We were able to communicate to the Governor’s staff that businesses whose pricing was controlled by a commodity-type of environment, and who did not have the ability to reprice their products to recover, should not have to deal with gross receipts. That was one issue we felt very strongly about. We would suggest that that be included in our bill.
We’ve also heard arguments about pyramiding. We don’t believe the pyramiding argument is unique to the gross receipts tax, nor do we think it is what it’s been profiled to be. Referring to the difficulty of administration, we believe that implementation of such a tax is a very do-able thing at a very reasonable cost. The one argument that’s raised that’s a bit more difficult to deal with is the issue of the high-volume, lower-margin businesses, which is, I think, the group that you’re referring to. If a business is high volume, high margin or anything that involves high margin, it will probably worry less about a gross receipts tax. A business that is low volume is probably going to be exempted under our threshold exemption anyway. That’s the one group we have a bit of difficulty with from the standpoint of fairness and equity.
[Mr. Hobbs, continued.] We gave some thought to how to deal with that. We think the application that we’ve recommended to you needs improving upon, if it can be done in a nonpervasive way that actually cures just the problem that we’re focused on. Often when we deal with exemptions and credits and such, we tend to over-cure the problem by giving the solution too broad an application. In our judgment it would be a mistake to do that here, but if there were a way to identify a certain type of business to apply a different treatment to, that would make sense.
It’s important to note that, though we recognized the problem, we didn’t recommend 2 rates or 3 rates or 18 rates or something along those lines because that’s a very difficult thing to do. Part of the simplicity of this gross receipts proposal is that it is a single tax regimen. Part of the uniformity argument is that it is a single tax regimen. Once you open the door by having more than one rate, that can become problematic. In my opinion, a more appropriate way to try to address the problem Assemblyman Hettrick identified would be to deal with the matter on the exemption side, much the way the state of Delaware does. Delaware has lower tax rates and more exemptions than other states that have similar types of mechanisms. As this discussion continues, we would certainly encourage paying additional attention to that particular area. We see this as the one most difficult argument to discount very easily. We feel we have a reasonably good counter for the rest of them.
Assemblyman Mortenson:
We’ve heard some things about the Delaware system, which seems to promote it as one of the better of the bad systems. All taxes are bad. Can you give more information on how they treat, or if they treat, a situation where a business has a lot of gross and very little profit?
Jeremy Aguero:
They use several rates and several exemptions, so they’ve worked over time to try and balance the exact question that you’re asking by manipulating their system to make it work for them. Granted, their economy is different from the economy here in Nevada, so our tax system would likely be different as well, but they use different rates and different exemptions. The Delaware tax generates about $116 million a year for the state of Delaware, and I would agree with you that it’s recognized as a more equitable approach.
Assemblyman Mortenson:
Are those different rates by industry? [Mr. Aguero replied in the affirmative.]
Guy Hobbs:
Having looked at that as well, our recommendation would be to give more consideration to exemptions than to multiple rates. You can get there from either side, but the exemption side would seem to us a more attractive approach if it’s directed at a certain type of business and perhaps provides a different level of quarterly exemption to allow leveling of the playing field for those truly low-margin, high-volume businesses.
Jeremy Aguero:
The next frequently asked question is, “Can the gross receipts tax be deducted from the company’s federal income tax liability?” The answer to that question is, yes, it can. The federal tax forms, most commonly the corporation form 1120, allow a deduction for taxes and licenses paid in a state, so a significant share of the gross receipts tax paid to Nevada would directly offset federal income tax liability.
Another question that’s commonly asked concerns stability. Stability is often noted as a positive feature of the adjusted gross receipts tax. Why is this levy any more or less stable than other revenue sources the Task Force considered? Stability is largely a function of the broadness of the base. Because a gross receipts tax affects all portions of the economy it is as diverse as the economy. One of the problems we’ve noted with regard to the retail sales and use tax is that it’s narrow, and our economy has moved away from the types of services produced and sold within the state. As the economy changes, the gross receipts tax is able to adapt with it because of its size.
Assemblyman Hettrick:
I have trouble agreeing with that because we’re immediately exempting 60 percent of all businesses with the $350,000 or $450,000 exemption. Then Mr. Hobbs says that where we have a problem, exempt them. If we can’t make it fit, take it out. If you eliminate 65 percent of the businesses, how do you call it broad-based? It certainly is not as broad-based as some of the other proposals that don’t eliminate businesses. I don’t see how you can call this broad-based, stable, and matching the economy when you eliminate 60‑65 percent of all businesses.
Guy Hobbs:
I don’t want to recite an overused phrase about the lack of perfection of any tax. Clearly you have that here. One of the things we did to include the smaller businesses that are otherwise exempt is have them participate in the payment of the higher business license tax without the benefit of the credit back. That’s the way we have the smaller businesses participating, so while we say they’re exempt from the gross receipts side, when you consider the full integration of the business license tax with the gross receipts tax, they’re still contributing. They’re exempt from one part but not the other, and are still contributing as a whole. We felt we needed to offer the small start-up businesses some level of protection but at the same time have them participate, because they’re consumers of public service just the same as anybody else. That was the way we chose to do it. Whether that was the best way of doing it, it was the best that we could think of to put forth to you.
Jeremy Aguero:
In addition, the gross receipts tax doesn’t suffer from some of the vulnerabilities that are inherent in a corporate income tax, and I think that’s one of the things that the Task Force considered. Corporate income taxes over the last two years have shown extreme variability at the state level, down some 22.5 percent. Retail sales and use tax, which would have a base somewhat similar to a gross receipts tax, has only been down 3–4 percent during the same period, obviously reflecting the wider base and the fact that you’re looking at the top line instead of the bottom line.
Section 19 of A.B. 281 provides a deduction for “pass-through revenue.” This has certainly been an area of question. “Pass-through revenue” is revenue received in transactions in which the seller does not have an ownership interest in the item sold when acting on consignment, when acting as a broker, or when there is a disclosed agency relationship. A very common question is, “Will real estate agents be required to pay the gross receipts tax on the total value of a home or building that has been sold?” The answer is no, they will pay on the commission that they receive.
The question has been asked, “Will attorneys be required to pay the gross receipts tax on the total value of the trust that they hold for a client?” The answer is no, that’s a disclosed agency relationship.
The question has been asked, “Will banks and financial institutions be required to pay gross receipts tax based on the amount of deposits that are held in their institutions?” The answer is, “No, they don’t own them.”
Another commonly asked question deals with travel agents and whether they will be required to pay on the total value of what is sold. The answer is, “No, they never own the services they sell, they merely broker those.” The tax applies only where there’s an ownership relationship.
A.B. 281 also provides an exclusion for revenue upon which gross gaming tax or slot route tax is imposed. We are often asked why those groups are treated differently. Revenues subjected to the gross gaming taxes, as Guy alluded to earlier, are excluded because they’re subject to an equal and accompanying increase in the gross gaming tax. Simply put, they didn’t want to tax them twice, once with a broad-based gross receipts tax on their gross gaming revenue and again with the gross gaming revenue tax.
[Mr. Aguero, continued.] Slot route exclusion, which is also included in the Task Force bill, was a drafting error. That wasn’t intended to be there and should be removed.
Another question we get with more and more frequency concerns the moratorium of taxation against Internet services and whether the Internet services would be subject to the gross receipts tax or be excluded by definition because of the federal moratorium. The federal moratorium on Internet services is limited to the provision of Internet services. You can’t tax the sale of those. It does not prohibit the taxing of businesses that provide Internet services so, yes, they will be subject to the gross receipts tax.
The next question is, “How will the tax treat multi-state businesses with operations inside and outside Nevada?” Section 20 of the Task Force bill denotes that multi-state businesses with a minimum physical presence in the state will be subject to the tax based on the share of their business occurring within the state. The allocation or apportionment formula will be based on the Uniform Division of Income for Tax Purposes Act (UDIPTA), which was developed by the Multistate Tax Commission, and which provides for how revenues are distributed mathematically among states when the states operate in multiple jurisdictions. Special UDIPTA provisions were developed for interstate transportation as well as financial services. Groups of people with industry-specific experience got together at the Multistate Tax Commission and came up with fair ways to allocate these taxes and they constitute a good model to start from.
Assemblyman Griffin:
I’m not entirely familiar with UDIPTA. Are those the same standards they use for apportionment allocation for sales taxes, meaning that you wouldn’t be paying sales taxes on those revenues generated by sales coming from other states?
Jeremy Aguero:
No, UDIPTA is different. It’s specific to income taxes, or taxes based on income. When you’re talking about retail sales and use tax you’re talking about an origin- or destination-based tax, and that’s really where the apportionment formula goes. When you’re talking about an income tax, you’re talking about the activity, either sales or production, that’s occurring in a specific area.
Assemblyman Griffin:
Does it make sense to base or calculations on the sales tax formula in use rather than on UDIPTA? We heard testimony from Amazon.com where I’m guessing more than 90 percent of the revenue is generated outside the state of Nevada. There are administrative challenges that would come into play in trying to apportion and allocate that, and I’m wondering if there are existing formulas that could be used to make that simpler.
Jeremy Aguero:
There are existing formulas and UDIPTA, or some modified form of UDIPTA, would help do that, but the only thing I would caution you on is that, by adjusting the formula, you assist some industries and you hurt others. It’s merely a policy question.
Assemblyman Goldwater:
Mr. Griffin will recall a bill that helped Nevada become a leader in the streamlined sales tax project, and that’s one of the things that simplifies the collection of transaction-based taxes.
Jeremy Aguero:
A final question is, “Will the state of Nevada need a mini-IRS in order to administer the gross receipts tax?” The answer to that question is no. The Department of Taxation can certainly give a more complete answer than we can, but the gross receipts tax has among the lowest administrative costs of any levy that the Task Force considered. While it will undoubtedly increase the burden on the Department of Taxation, as will any new tax, given the state of the Department’s current information technology infrastructure, to suggest that it will require an agency of a magnitude or structure similar to that of the IRS is a dramatic overstatement of what would be required to administer the tax.
Assemblyman Grady:
Can you give us an idea of the number of employees now at the Department of Taxation compared to what they’re using in the state of Washington to administer this department?
Jeremy Aguero:
I do not have that number. I know Chuck Chinnock is in the audience. I don’t want to put him on the spot, but if he can’t answer it, we can certainly get that information.
Assemblyman Goldwater:
One of the things I dislike about discussing taxes is the abuse of clichés. Everyone interprets the clichés a little bit differently. One that we keep hearing and I want to ask about is how the Task Force defined the pyramiding of taxes. Did I miss that while I was doing my bill in the Senate? [That was confirmed.] I’ll read it or discuss it with you privately.
Guy Hobbs:
We from the Governor’s Task Force, myself as Chairman and Jeremy Aguero as the principal researcher on this, wish to thank the Legislature for the opportunity to work on this very fulfilling project. We’re obviously dealing with recommendations that people have certain viewpoints about. I would never have believed that people would have looked at recommendations for new or increased taxes as necessarily a positive thing. One thing we learned as we went through the process was that at the end of the day, there was a very limited number of options for us to consider from either a revenue sufficiency standpoint or a stability standpoint, so the process you asked us to go through was very necessary. We appreciate the opportunity to have been of service and to have brought these recommendations to you.
Chairman Parks:
I’d like to ask Mr. Chinnock if he has any remarks he’d like to make at this point.
Chuck Chinnock, Executive Director, Nevada Department of Taxation:
I have a presentation booklet, but perhaps I’ll pass that out at the next meeting when we discuss the business tax. With respect to the gross receipts tax, what I could say regarding the manpower costs is that we were showing a manpower cost for the biennium of $6.8 million, which is $3.4 million per year. Depending upon which plan you look at, we’re talking about revenue of approximately $200–$230 million a year and a cost of about $3.4 million a year to implement that. That does not count the information technology, which would also be needed. We were talking about information technology for the Department in any event.
Assemblyman Marvel:
What would the information services cost, do you think? Would it be as expensive as ACES (Automated Collection Enforcement System)?
Chuck Chinnock:
We presented an information technology notional range of somewhere between $18 million and $28 million. About two weeks ago, we submitted a request for information on information technology. That is being put together right now to come up with not only a time line but also a cost. I think that’s probably still a pretty close estimate.
Assemblyman Marvel:
Would it be like NOMADS (Nevada Operations of Multi-Automated Data Systems) and a few others?
Chuck Chinnock:
No, sir. I’m pretty sure when we come up with a number in the range of roughly $20 million, we’re going to be able to do the job of enhancing and updating the Department.
Chairman Parks:
I think a number of us have gotten e-mails or letters from various vendors who are producers of various off-the-shelf services. Have you been approached by a variety of those?
Chuck Chinnock:
Yes, sir. We have well over a dozen vendors who have submitted information at our request. When we asked for information from the vendors we told them we were looking at a variety of options that would range anywhere from doing it in-house to outsourcing. We told them we were looking at creative ways to implement it and creative ways to fund it. As a result of that, we will have at least a couple of options to bring to you and show you what we can do.
Assemblyman Mortenson:
I admit the exact same thoughts were going through my mind that were going through Mr. Hettrick’s mind when we started talking about stability of taxes. I personally think that if times get very bad, government should suffer as well as businesses. I don’t like the idea of the government having a steady stream of income when businesses are hurting. Mr. Hettrick talked about the possibility of using federal information to impose an income tax for businesses, and he stated that it would be quite simple. Do you concur with that? Can we get the information from the federal government that would allow a very simple income tax system to be set up for the state?
Chuck Chinnock:
We do have a sharing agreement with the IRS, but it is only a one-way sharing agreement. They share information with us; we do not share information with them. For implementation purposes, if we were to do that, we would ask businesses to report something that they would normally report off on a certain line for the IRS. I know there was some discussion regarding whether or not we would need to audit businesses if the IRS was auditing them. If you assume that the audit penetration at the IRS is doing the correct job, then perhaps you wouldn’t need to do that. From my standpoint as an administrator over taxes in the state, I think you would still have to have some independent audit program, so we would still need auditors. A determination would need to be made as to whether it was as simple as looking at the IRS filing or we needed to go further. Those issues would all have to be discussed.
Assemblyman Mortenson:
Your answer is a definite maybe, right?
Chuck Chinnock:
I would be more inclined to say that we would need to have some audit program that would be sufficient to ensure that it was causing a voluntary compliance within the state of Nevada.
Assemblyman Mortenson:
Do you think you would need about 64 extra people? How would you compare it with the gross receipts tax in number of people that you would need?
Chuck Chinnock:
We have a total of 67 for the gross receipts. If you’re talking about personnel for the income tax, I’m not sure. I don’t have those numbers.
Assemblywoman Gibbons:
Could you tell me what the cost of the BAT (business activity tax) collection is right now? Will the majority of that collection cost go away if we incorporate the gross receipts tax?
Chuck Chinnock:
I do not have the exact number, although I would say that probably 20 percent of the costs to the Department is currently allocated to collection of the business license fee and administration of the business tax. Our annual cost is $16 million to run the Department.
Assemblywoman Pierce:
It’s a nice idea for the government to tighten its belt at times when the economy is doing poorly. The problem is that when the economy is doing poorly, the number of people in poverty rises. As a society, we have to make a decision about how much poverty we’re willing to tolerate. For government to tighten its belt at that point means the government is tightening its belt at the expense of poor people. History has proven that there’s a level of poverty that Americans do not want to see in their midst. That’s the problem with the idea that government should act just like business.
Karen Pearl, Executive Director, Nevada Telecommunications Association:
I represent all the local telephone companies in the state of Nevada, anywhere from 200 access lines to over 800,000. I have prepared written testimony for you (Exhibit D), but I am only addressing two sections of A.B. 281, one being Section 8. As Mr. Hobbs just indicated, in Section 8, subsection 2(b), the exclusion of the public utilities for gas, electric, water, and sewer is included. Telecommunications is not. The Association objects to that because we are regulated exactly the same way as the other utilities are. All the local telephone companies who are regulated by the PUCN (Public Utilities Commission of Nevada) should be included in the language. In the alternative, if telecommunications is not included in the language you could take Section 8, subsection 2(b) and have it rewritten to say, “any operating revenue of a public utility.”
The second section that the Telecommunications Association would like to address is Section 11, which states that, “no business entity may pass the proposed taxes on to its customers.” The Association seeks clarification of this provision. Under longstanding existing statute and regulations of the PUCN, utilities should include federal, state, and local taxes as part of their rate making. We also seek clarification stating that this provision does not prohibit inclusion of the proposed taxes in our operating expenses data submitted by the public utility to the Public Utilities Commission in a general rate case. Moreover, the Association asks that the companies under the plan of alternative regulation authorized by the Commission, or those companies that do not regularly file general rate cases, should be allowed, under the statute, to pass through these types of fees and tariff charges in the same way that local franchise fees are treated today.
Carole Vilardo, representing the Nevada Taxpayers Association:
[Introduced herself.] I won’t be able to do this in two or three minutes, so I’m just going to hit some highlights and try to speak to you all individually. The Association took a position on all the taxes that have been raised. We support most of the provisions within the Task Force Bill, A.B. 281. However, we oppose this particular provision. I submit to you that if you attempt to pass this provision without very serious amendments, this is not something that can be complied with easily.
You have another problem with hospitals in this particular bill. Hospitals are given the right to have a deduction for payments received from government, but not health care providers. If you don’t allow these payments, such as are made for Medicaid, in my opinion you will have doctors and private practitioners in health care who will not take Medicaid patients. You also are creating a differential between for-profit hospitals and nonprofit hospitals, and, without amendments, you’re exacerbating the situation that is occurring right now.
[Ms. Vilardo, continued.] There was discussion, and I know it was one of the questions we raised, about how you would accommodate cash basis accounting. The testimony by Mr. Hobbs was that if you were on a cash basis, that’s the way you would report, and that’s the way you would be held for purposes of audit. However, I have read this bill more times than I care to admit, and I have yet to find that distinguishing point. I would submit to you that you absolutely have to clarify that provision.
You need to look very seriously at the provision that deals with manufacturing, because you’re literally getting them coming and going. When you realize that the state of Washington had the greatest percentage of jobs lost from manufacturing and Nevada had the highest increase percentage-wise in manufacturing jobs, do you really want to go there?
There is a big philosophical question as to how viable this tax is within the overall scheme of things. With the amount of exemptions on the tax, it is not broad-based. Within the context of the whole package, you might refer to it as broad-based, but you’re looking at 50–60 percent of the businesses being exempted so that does not make it broad-based. You can’t say that it is a stabilizing force because it doesn’t come in for two years, so it will have absolutely no impact on this biennium. As far as being a stabilizing force, at the best estimate, assuming you don’t add any other exemptions, if it were to be processed, it would be less than 10 percent of your General Fund revenues.
The two taxes you have to stabilize, whether anybody wants to do it or not, are sales tax and gaming tax, because even with this gross receipts tax, those will represent the greatest part of your revenue source.
There is also the issue relative to telecommunications. You have also got the received and receivable issue that absolutely needs to be clarified.
Overall, I prefer the language in a number of sections dealing with gross receipts in this bill over that in the Governor’s bill, but there are still a number of problems in the language of this bill that must be clarified. I do not know that you have enough time in the session, getting amendments done, having them put into formatted form, and having us vet them, to get this implemented. That is problematic. I will try to talk to you individually. This tax has a lot of work that needs to be done on it, and I look forward to the sections of the bill that I can support, which are the majority.
Assemblyman Griffin:
Did you say that you would want major amendments to A.B. 281?
Carole Vilardo:
I believe I sent to the Committee, as I did to our membership and our board and the Senate, a list of questions that was presented. You should have it.
Assemblyman Griffin:
Maybe you and I can talk about it separately. The state of Washington’s gross receipts tax has a series of complicated rates that change. Do you know when they last changed their manufacturing rates? [Ms. Vilardo replied that she did not.] Didn’t Washington lead the nation in manufacturing jobs in the 1990s?
Carole Vilardo:
They may have done so in the 1990s, but that has totally changed. Our economies are not similar, so transposing a tax which has very limited application and literally is applied only this way, even though you’ve tried to modify it, still does not work for our type of economy.
John Satterfield, Jr., Citizen:
I would just like to make a couple of observations. The point concerning stability and uncertainty of collection of the gross receipts tax was made several times. It seems to me that in adopting A.B. 281, you’d be trading stability for fairness, because a net income tax on business would be much more fair, and I would support the net income tax.
There was a reference to the corporate income tax. I assume that this tax would also apply to sole proprietorships. “Sole proprietorship” doesn’t mean there are no employees. “Sole proprietorship” means the business is not incorporated or in a partnership. A sole proprietorship could be a major business with 100 employees or more. I suggest if you go to an income tax, you don’t talk just about corporations. You also need to talk about sole proprietorships as well.
On the issue of simplicity, I don’t see what could be simpler than a net income tax. Just ask each business to attach a copy of whatever tax return they’re filing with the federal government, along with the appropriate schedule. For audit purposes, however, you’d probably want the whole tax return. For an individual, it would be Schedule C of form 1040. Even for a sole proprietorship, there is a form that you could ask the taxpayer to submit that would be auditable.
[Mr. Satterfield, continued.] The point was made about the auditors needed to audit the system. There would be auditors needed for the gross receipts tax as well. We’re not just talking about auditors needed for a net income tax, if any, but you also need auditors for the other system and I can’t imagine it being any simpler than this. In connection with that, there’s the issue that was brought up of more creativity being possible in reporting net income. That, of course, is true, but the federal government is just as concerned about creativity as you are, and that’s why there are rules for federal income tax purposes in determining net income and why the federal income tax returns are audited. I don’t know that you really need to be concerned about creativity. Let federal government audits and procedures take care of that.
If you want to accomplish social goals, which I don’t recommend, another social goal would be businesses that make donations. You could build socially desirable objectives into the way you structure the tax. For instance, you could tax 5 percent on net income less contributions to health care or less donations made to whatever charities you would choose. I don’t recommend it, but that’s the way it could be done. It would still be simple and easy to audit.
I hope it’s not too late for the Committee to consider a net income tax. My impression is that you have a very capable, analytical research department for tax purposes, and I would encourage you to get them going now. I fear the reason you’re not talking about a net income tax in any depth is because it seems too late to gather the data. It may be that the data are not that hard to get and that you could come up with a full-blown proposal as to how much the tax rate would have to be to have a net income tax on business in the time that you have left.
Janine Hansen, President, Nevada Eagle Forum:
[Introduced herself.] I’m sorry there isn’t more time today to respond to the two and a half hours of reasons why we need to raise our taxes. I would first like to address the issue of increasing the size of the bureaucracy, which this particular bill will do. It’s been stated by the previous speakers that this didn’t have any relationship to something like a mini-IRS. I would beg to differ. I gave you an editorial from the Las Vegas Review-Journal (Exhibit E). The impression of many who have read the bill is that that’s precisely what it will do. We are all tax slaves to the government, and this will just increase the level of our slavery.
Page 3, Section 11, of the bill, talks about businesses not being able to pass the tax along to the people they do business with. That’s a false assumption. Businesses do not pay taxes; people do. Somewhere, there is a person who’s going to be paying that tax. Their personal income will be going down and all that they have will be reduced. No matter what you put in the statute, it won’t make any difference. That’s the reality of it.
[Ms. Hansen, continued.] At the bottom of that page, under Section 13, we realize that we’re going to have this huge record-keeping project, another great imposition on those of us who reject the notion of what the IRS does to our lives. On page 14, we have the same thing. We’re going to have these auditors coming to check. They’ll have to check those businesses that make far less than $350,000 gross, because they’ll have to make sure that they are complying. This does not limit their ability to go to the very smallest business to see whether or not it is complying with this legislation, so we will have created the Gestapo/IRS in our own state. What happens under administrative law? What we know about administrative law is that people lose their constitutional rights. They lose the right of due process; they lose the right to trial by jury; they lose the Fourth Amendment right against search and seizure. Right here it says they have to comply and give the government all their books, but they have no constitutional protections whatsoever.
The Nevada Constitution, unlike the United States Constitution and other states’ constitutions, provides that a person gets a jury trial even in a civil case. Of course, this isn’t civil; this isn’t criminal; this is administrative. All of a person’s constitutional protections that our forefathers fought and died for are eliminated because we make this an administrative procedure where people do not have any constitutional rights.
On page 11, the bill provides that, after a determination has been made by the Tax Commission, a business can appeal within 90 days. It limits a business’ access to redress of grievance here, and it limits the ability to have resolution in the courts. Because it’s an administrative procedure, it takes away all Constitutional rights, just like the IRS does, and then it limits the ability to appeal. Of course, we have to prove this is not like an income tax and so, on page 7, line 18, we say, “This does not constitute an income tax.” If they hadn’t told us that, we wouldn’t have known, because it looks just the same.
I’ve given you a couple of other items. One is an excellent article called “The Destructive Impact of a Gross Receipts Tax,” from the Nevada Policy Research Institute (Exhibit F). It talks about the fact that one of the biggest problems of this tax is that, in the Los Angeles area where they have this, 40 percent of the firms that are obligated to pay this don’t pay it. There are a tremendous number of people, just like a growing number of people with the IRS, who don’t pay what the government says they owe. There is going to be a tremendous problem of enforcement in the state of Nevada. The article also goes on to talk about the bipartisan recognition in the state of Washington this tax has been a failure and that business is fleeing Washington. Is that what we want? Do we want to stop the diversification in our state so we don’t have any more businesses here? We don’t have any more jobs here? That’s precisely what this particular tax will do, and this is a very good analysis of why that is the case. I suggest that you take the time to read this.
One other article is “The State Factor” (Exhibit G), which shows that, in the early 1990s, when states that were in recession cut their taxes and cut their spending, their revenues increased and they had increased prosperity in their states. It also shows that, during the recession in the 1990s, states that increased their taxes decreased the jobs and decreased the numbers of businesses in their states. Businesses fled those states, and the states suffered decreased prosperity. Those are the circumstances of what actually happened in those states. Let’s remember that this is a stealth income tax in the state of Nevada. They had to put that language in there just to prove it wasn’t.
John Wagner, representing the Burke Consortium of Carson City:
[Identified himself.] I’ve heard testimony from the Governor’s staff about the problems they foresaw in the budget, the so-called revenue shortfall. I did not hear them mention anything about trying to see if they could find some spending cuts. I don’t think they did. I think they said, “Well, we need so much money; let’s go for it.” The Governor, before the election, was able to proudly announce that he had saved money by attrition and one thing and the other. What did he do with that money? He turned around and gave fat increases to some of his henchmen. To me, the Governor doesn’t cut spending, he just taxes.
There’s supposedly a funding gap. We need to reduce some of the programs that we have. In a time of economic downturn, you don’t raise taxes. This works backwards. Also, there’s going to be a cost involved in collecting these taxes, it’s not just all going to flow in. We can’t just ask how much money a business took in this year and ask them to send it all in. I have a daughter who wants to flee the state of California in the next four or five years. She has a master’s in business administration, but she’s not going to be able to find a job because businesses, I expect, are going to be smart and get out of here. When she comes over, I’m just going to say, “Hi, have a nice visit and go over to Utah.”
Anything that hurts business is going to hurt the state of Nevada. Businesses collect the taxes, but if they’re not making any profits, then they’re paying taxes out of what they don’t have or out of their pockets. If you hurt businesses, they’re going to get out of here. We need to encourage businesses to come here. California has a lot of businesses that would like to get out of there, and we ought to tell them, “Come on over here. Stop by Carson City, Reno, some of our more eastern parts of the counties. Come on over here and establish your business and hire people.” We want jobs created for our people.
Chairman Parks:
I know there are individuals who need to go to their Elections, Procedures, and Ethics Committee meeting. I will excuse them, and this Committee will become a subcommittee to continue taking testimony for a while longer. We have a gentleman in southern Nevada who wishes to testify.
Grant Hudlow, Citizen:
I wanted to be very specific. The school system in Pahrump, Nevada, has a man named John Francis who is taking the uneducable children, the children who’ve been kicked out of school. For $1,000 per child, within three or four months he has them head and shoulders above the rest of the school children. It normally costs $5,000 per student in the school system to wreck a child. Even if you exclude the 15–20 percent of the children who get a good education in Nevada, you’re still talking about a $600 million per year savings. Where you have a $250 million shortfall, it seems to me that would handle it easily.
The legislative Committee on Education has heard this testimony for a while. The research assistants have tried to find out how this works; they’re not able to understand it. If the Chairman would ask the legislative research staff for the information again, you could solve two problems at once.
Jim Endres, representing the Franchise Owners Association:
[Introduced himself.] With me is Rich Rose, who represents the 200-plus 7‑Eleven franchise stores around the state of Nevada. He’s here today to comment on A.B. 281 with respect to gross receipts.
Rich Rose, President, Cal-Neva Franchise Owners Association; representing the 7-Eleven Franchise Owners Association of Southern Nevada:
[Introduced himself.] The Cal-Neva Franchise Owners Association represents the 53 7-Eleven stores in Reno and the Lake Tahoe area. I’m also speaking on behalf of the Franchise Owners Association of Southern Nevada, which has over 150 stores.
We support the Governor’s effort to balance the budget, and we are ready to pay our fair share. We know what it’s like to meet the bottom line. However, the gross receipts tax does impact our industry negatively. On a personal note, my wife is a nurse with the Washoe County School District, which is slated to lose 3 nurses out of 30, a 10 percent cut, so I’m torn. We need to support the Governor’s bill so we can raise money for our children.
[Mr. Rose, continued.] As convenience store owners, small businessmen, and franchisees, we operate on a very small margin. The average store in northern Nevada does around $1 million dollars. Our franchiser takes 52 percent of the gross profit of that; we get 48 percent. According to our agreement, one of our expense lines is that we have to pay the taxes and licenses. So, we will pay 100 percent of this tax while we will only get 48 percent of the profits. This tax will have an incredible impact on our bottom line. It could be as much as 10, 15, or 20 percent for some of our franchisees. These are sole proprietors who operate under a franchise.
That is the merchandise end of our business. Now let’s focus on the gasoline end of our business. By our contract, we get 1 cent per gallon. 7-Eleven proposed, under a policy arrangement, to increase that to 1.5 cents. It costs us 1.6 cents to pump our gas, so we’re not breaking even. We would pay for the entire tax, yet we’re going in the hole every time we pump a gallon of gas. What do we do? Tell the person not to buy gas? We would have to decrease our business.
Last year, 7-Eleven closed two stores in the Reno-Tahoe area. Three to five stores could be forced to close if they are hit with any more taxes or expenses. I don’t know what that would be in Las Vegas, because they have three times the number of stores.
We do support a tax. We need a broad-based tax, but the gross receipts tax is not the answer for our business or any business that has high sales and low margin.
Assemblyman Hettrick:
I had a conversation with a gentleman who doesn’t own a 7-Eleven franchise but has a mini-market combined with a gas station in Douglas County. One of the comments he made to me which I found very interesting was, “What you’re talking about doing up there is raising the cigarette tax and the alcohol tax, which amount to about 25 percent of my total business, and then you’re going to turn around and charge me gross receipts on the taxes.” Unless we’re going to go in and audit every single one of these businesses and exempt this as a commodity or a pass-through, we’ll have to audit every single store, or else they will be paying gross receipts on cigarettes and alcohol. They’ll pay tax on the tax for the privilege of collecting it for free for the state of Nevada. If this isn’t an inequitable tax, I don’t know what is.
Rich Rose:
With the 7-Elevens, that figure is much larger.
Sally Devlin, Citizen:
My complaint with the Committee on Taxation is that when you look at modern schools or modern business or modern anything, what are we going to have? We’re going to have virtual sales; we’re going to have virtual food; we’re going to have virtual everything. All we need is roads. If we have a virtual society that is going to propagate and populate the rural areas along with virtual education, medicine, library, mental health and so on, you’ve got to stop looking in a orthodox, normal, regressive manner to what the world is going to bring. We are at the bottom of the barrel in every single thing. We have nothing in the rural areas. We’re going to lose population. Our school district should be dissolved; our school board should be dissolved; our Board of Regents should be dissolved. We should have proper people like Wisconsin, which is documented, and all that documentation went in two years ago.
Why are Iowa and Wisconsin the best states for education, and why are their people not taxed astronomically, as we are, and our tourists taxed the same way? It is because Wisconsin’s governor, Tommy Thompson, dissolved 195 school districts and 95 phone companies, retrained the teachers, threw out the old sit-down-and-shut-up and got the world’s greatest programs. The same thing happened in Iowa. Now their children are number one in the nation for education, and are in demand everywhere. They can sit in their farms in Iowa and Wisconsin and talk to the world and run businesses all over the world and purchase everything from all over the world because they have the tax money for the roads.
Chairman Parks:
This is the Committee on Taxation, and we’re talking about gross receipts.
Sally Devlin:
You certainly are and I think it’s an abomination, I think it is a hardship. I think it will put businesses out of business, and I think it will be fraud because there is no accountability in this state for most anything. That is my opinion, and I want it on the record.
Peter Krueger, representing Nevada Petroleum Marketers:
[Introduced himself.] In the interests of time I will turn my time over to Art Hinckley, who will make the comments for our association.
Art Hinckley, Berry-Hinckley Industries:
[Introduced himself.] I want to talk a little bit about our specific company, which I think is pretty representative of the petroleum companies in our state. We have 30 convenience stores, 25 unattended commercial fueling sites, 12 petroleum distribution facilities, 2 petroleum storage terminals, and, in addition, we supply 32 independently owned convenience stores. We sell approximately 200 million gallons of fuel per year, and we have approximately 500 employees.
We handed you some information (Exhibit H), and I want to highlight some specific points and give you some specific numbers for our company. These are the numbers for 2001, because this report was done before the end of last year, but the 2002 numbers are very similar.
In 2001, our company had in excess of $250 million in sales. Our bottom line net profit was 0.69 percent, or a little less than three-quarters of a percent. The 0.25 percent gross profit tax would be 36 percent of our net profit, or approximately $645,000. Our company is similar to other companies. There was a study done on 98 large petroleum distributors around the country. Their bottom line net profit was 0.61 percent, so we’re actually doing a little bit better than the average of some of the best petroleum distributors in the country.
Our company simply would not be able to absorb the $645,000 gross profit tax that we would owe. Over the last few years our costs have been steadily rising, our insurance has quadrupled, utility costs have gone up substantially along with other costs, and, in addition, our competition has changed. Instead of just competing against convenience stores, we’re now competing against Wal-Mart, Sam’s Club, Costco, and various grocery stores. They often use fuel as a loss leader, selling it for virtually nothing, or even below cost. The reason I tell you that is because over the last few years we have cut every cost we can and have tried to become as efficient as our company can possibly be to compete in this new environment. That’s why there’s nothing left for us to do to absorb this new tax. The only large, controllable cost we have left is our labor cost, and our employees have not had raises for two years now because of the difficult conditions in our industry. If this tax is approved, there are not going to be any raises in the foreseeable future, and there are probably going to have to be some decreases. Our 500 employees are going to have to take on a big burden so that we can pay this tax.
Another problem we have with the tax is the volatility of the cost of fuel in our industry. For the two months ended February 2003, versus the two months of 2002, everybody knows how much prices ran up at the beginning of the year. Our dollar sales went up about $15 million, or 52 percent. Our product sales increased by only 7 percent. In reality, because the wholesale prices increased so fast that retail prices couldn’t keep up, our profit margins were actually lower. We would have had a 52 percent increase in our gross profits tax because of the increased dollar sales, which would equate to an extra $36,000 when, in reality, our profit margins were lower than the previous year.
[Mr. Hinckley, continued.] Another problem we have with the tax is the pyramid effect. There are basically three classes of trade in the convenience store industry. There’s a major oil company that owns its own convenience stores. They bring the fuel into Nevada, sell it retail, and the tax would be paid. There are distributors like us who owns their own convenience stores. They buy the fuel from a major oil company and the tax is paid there. Then they would sell it retail, and the tax would be paid again. Lastly, there’s the independent owner of a convenience store, the small operator, who would buy from somebody like us. We buy the fuel from the major oil company; the tax is paid there. We sell it to the independent operator; the tax is paid again. Then they sell it at retail, and they have to pay the tax again. The small operator would have the tax charged three times in his costs, versus a major oil company that paid the tax only once. It’s hard enough to compete against those big companies as it is, let alone against this competitive advantage.
For our industry, we feel our company is one of the bigger, more efficient companies. I think a lot of the other companies like ours in Nevada would have an even harder time dealing with this tax. For our industry, this tax is a disaster because of the high volume and low profit margins. To put a couple of numbers to it, a low volume, high profit margin business might bring 20 percent to the bottom line. Those companies are out there. They would need $5 million in sales to make $1 million; their gross profits tax would be $12,500. A petroleum company like ours would need $150 million to make $1 million. The gross profits tax on that company would be $375,000. This tax is very unfair because of that huge discrepancy. There’s got to be some way to come up with a better tax that’s fairer to all businesses.
I read in the paper this morning that the proponents of the gross profits tax realize it’s not a perfect tax, and they realize the high-volume, low-profit-margin companies will be hurt. They say no tax is perfect. That’s all fine and good unless you’re one of those companies like us. There’s got to be a better way. Most large companies are low margin companies. I think the gross receipts tax is going to have a drastic impact on economic growth and economic diversification in Nevada. A large company with a low profit margin is not going to move to Nevada.
Assemblyman Marvel:
I think you have the same dilemma that most people do in that yours is a quasi-commodity market, and there are fees you have no control over.
Art Hinckley:
If we could make 10 cents per gallon, retail, that would be good for us. If the fuel costs $1.50 a gallon there’s very little room for us to play, and we have little impact over what fuels cost. We just go with the flow. We get charged what we get charged, and we price accordingly. If the prices go up, we pay more gross profits tax, but we don’t make any more money.
Assemblyman Griffin:
I just went back through the deductions. I thought fuel was exempted from this, but it’s not. Mr. Krueger and I have talked about this, and I understand your concerns.
Art Hinckley:
Those numbers I gave you are net of the fuel taxes. That’s assuming that fuel taxes are deducted.
Dennis Sponer, President, ScripNet:
[Introduced himself and read from prepared testimony (Exhibit I).] I’m opposed to the gross receipts tax for two reasons. First, different businesses get to keep a larger or smaller percentage of their gross receipts depending upon their industry. Second, the tax has a pyramiding effect. The same revenue is taxed multiple times.
I would like to walk you through how my company will be affected by this tax. ScripNet processes prescription drug claims for property and casualty insurance companies throughout the country. I started the company in 1997 and, in 2002, Inc. magazine ranked my company the 34th‑fastest‑growing privately held company in the United States. Last week I was in Boston to receive an award on behalf of the Initiative for a Competitive Inner City. Out of over 5,000 nominations, ScripNet ranked number two in the Inner City 100 and we were the only company from Nevada that made the list. We employ 30 people in Las Vegas and will have revenues of approximately $18 million this year.
ScripNet sends prescription benefit cards to covered individuals who then present their ScripNet card to one of our network pharmacies. The pharmacy electronically bills ScripNet; ScripNet bills our client, the insurance company; the insurance company pays ScripNet; and ScripNet pays the pharmacy. We are essentially a data and claims processing center. Over 80 percent of ScripNet’s gross receipts are immediately paid back to our contracted network pharmacies, and therein lies the rub of the gross receipts tax. For every dollar ScripNet will be paid, we will pay one quarter of one cent to the state.
[Mr. Sponer, continued.] Last month, ScripNet was paid almost $1.5 million by its customers. Almost all of that money came from outside the state of Nevada. Under the proposed tax we would then pay $3,750 to the state. Our biggest concern with the gross receipts tax is that it does not account for the fact that over 80 percent of that $1.5 million we collected in April will be paid out to our network pharmacies. Even though we get to keep only $300,000 for overhead and operational expenses, we would pay tax on the full $1.5 million.
The gross receipts tax, as proposed, is equivalent in our case to a 5 percent or more net income. In 2001, it would have been equivalent to a 19 percent income tax. We also feel that the definition of pass-through revenue in the proposed bill is not defined well enough to alleviate our concerns and would probably not apply to my company’s pharmacy cost-of-goods-sold expense.
The gross receipts tax also does not take into account the profitability of a business. Out of that $300,000 monthly gross margin, we pay the salaries of our employees, the rent and utilities, we make an allowance for bad dept, and we pay for all the other things that go into running a business. In the end we hope to make a profit; however, some businesses that are paid $1.5 million in a month get to take a larger or smaller percentage of that $1.5 million than others. For example, our $300,000 in gross margin is equivalent to, say, a law firm with $300,000 in monthly gross revenue. We feel that a tax on profits is more equitable.
The gross receipts tax is also harder on start-up businesses than established ones. In all but the first year we were in business, our gross receipts exceeded the proposed minimum, despite the fact we lost money in two of our first four years in business. In 1999, our third year in business, we lost over $47,000 on $513,000 in gross receipts. In 2000, we lost over $78,000 on $2.3 million in gross receipts. If forced to pay a tax in 2000, our net loss would have increased by almost $5,000. In ScripNet’s case, it has taken us years to get to a position to start to earn a consistent profit. The gross receipts tax hits a business from day one, whether or not it is turning a profit. We believe that entrepreneurship and economic diversification are important to Nevada. A gross receipts tax would stifle those goals.
Finally, we believe that the gross receipts tax is unfair because of its pyramiding effect. In ScripNet’s case, our network pharmacies in Nevada would have to pay a tax on the money we pay them. For example, if we pay tax on the $1.5 million we are paid this month, then pay $1.2 million out to our network pharmacies, the pharmacies must pay tax on that $1.2 million again. If the pharmacies pay $1 million to their drug wholesalers, the wholesalers would have to pay a tax on that payment from the pharmacy again. If, out of that $1 million, the wholesalers had to pay $900,000 to the actual manufacturers of the drug, the manufacturers would have to pay tax on the payment from the wholesalers again. In this example, total gross receipts tax would be $11,500 on the $1.5 million. In the end, we believe that the gross receipts tax is unfair.
[Mr. Sponer, continued.] Is $44,000 a year unduly burdensome to my company? Probably not, but it’s equivalent to one employee’s salary, and it certainly would have been burdensome when we were just starting out. This new tax increase will lead to the loss of existing and new investments in our state, which means fewer job opportunities. Businesses that cannot afford this tax increase will eliminate some jobs and those who do stay afloat will trickle this increase down to the consumer in the form of higher prices for goods and services. I own a company that will be grossly affected by the gross receipts tax, and I am concerned about my company as well as the well-being of my employees. As a business owner and a concerned Nevadan, I am opposed to the gross receipts tax. I ask you to explore other, more equitable methods of raising needed revenue.
David Schumann, representing the Nevada Committee for Full Statehood:
[Introduced himself and read from prepared testimony (Exhibit J).] I had a tough time deciding where to start with this economy-wrecking bill because it is so bad. On page 3, Section 11, Mr. Hobbs himself told me where to start: “The Legislature hereby finds and declares that the tax imposed by the chapter on a business entity must not be construed as a tax upon the customers of the business entity, but as a tax which is imposed upon and collectible from the business entity which constitutes part of the operating overhead of the business entity.” I, of course, know that the Legislature found no such thing.
This is Mr. Hobbs’ idea, and it really is scary to me that a fellow who has such a lack of understanding of economics is in the position to set taxes in the state. He might as well ask you to find and declare that it is not nice that people fall out of tall buildings and die upon hitting the ground and that therefore you are repealing the law of gravity. You can enact that paragraph, but it’s going to make the state a laughingstock. It is a violation just like the violation of the law of gravity. You can’t repeal the law of gravity and you can’t repeal that law of economics. It’s beyond any human being’s ability to do that. A business entity needs to recover all of the operating overhead, plus a profit from its activities, or it goes out of business. That’s the bottom line. Adam Smith figured that out hundreds of years ago.
[Mr. Schumann, continued.] Please turn to page 14, Section 43, subsection 1(b), for another example of Mr. Hobbs’ tyranny. The taxpayer must preserve his records “for four years or until any litigation or prosecution pursuant to this chapter is finally determined, whichever is longer.” So, if the taxman doesn’t find fault for four years and the taxpayer throws away his records, then he is in violation of the law if the taxman comes and he doesn’t have the records. This section basically says that we have to go into the warehousing business just to please Mr. Hobbs and the Governor.
The fact of the matter is that Nevadans are not untaxed. Attached to my testimony is a map (Exhibit J) displaying the results of a study by the Utah Legislature, the APPLE Initiative (Action Plan for Public Lands & Education). State and local taxes were equal to 10.2 percent of Nevadans’ personal income in 1998-1999. That is a higher level of taxation than Oregon, Texas, South Dakota, Florida, New Hampshire, Alabama, or Tennessee and just about equal to those of Colorado, Missouri, and Virginia.
Operating revenue for the state’s schools increased 25.1 percent more than enrollment did over the last five years according to a study done by the Nevada Taxpayers Association. The schools are not short of money, yet there are two major increases for the schools that are probably going to get passed. They’re under active consideration.
Chairman Parks:
Excuse me, Mr. Schumann. You’ve got to please contain yourself to strictly discussing this bill and the parts in it.
David Schumann:
I have evidence that the amount of money spent on education is inversely proportional to the results achieved. The point is, this whole business of a billion-dollar tax increase and this gross receipts tax is founded upon the false notion that this state must increase its spending. Therefore, the Governor has to have this stable source of income.
An earlier gentleman proposed a stable source of income that would be much more sure and would require far fewer auditors. It would simply be looking at the net profits tax that is paid to the federal government and taking some small percent of that. Now, Mr. Hobbs seemed to feel that business was inventive in determining its net income. The IRS has very strict rules on that. I have a degree in accounting and if you mess around with the rules as set forth by the IRS, you’re going to go to jail. So, within the rules set forth by the IRS, figure that net income tax and take a very small percentage of that. You’ll have a stable source of income without a huge bureaucracy of 67 people.
[Mr. Schumann, continued.] I was very disappointed that the gentleman from the Department of Taxation was unwilling to let you in on the secret that it will not take a lot of people to enforce that sort of thing. He wouldn’t tell you, but I know and I will bet anyone on this Committee a thousand dollars, that it will take fewer than 10 people to enforce it, not the 67. So, there’s a source of income. This gross receipts tax is an economy wrecker. Janine Hansen has, in her testimony, something from ALEC, the American Legislative Exchange Committee, which clearly shows that every state that increased taxes went down in economic activity and prosperity, and every state that cut taxes went up.
Eric Jenson, Citizen:
That was some strong testimony. Certain people may not have liked it but it was backed by facts, so, “Good job,” to Mr. Schumann.
[Mr. Jenson spoke from prepared text (Exhibit K)] Thank you very much for taking time from your schedules to listen to the people of Nevada. As we know, it is the Legislature’s job to carry out the will of the people and to enact laws that are in the best interests of Nevada and its citizens.
I am a 7½-year resident of Nevada and the president of a small business, domiciled within the state, called Jenson and Associates. We provide our clients with IRAs, 401ks, mutual funds, annuities, life insurance, and other financial services products to help them prepare for their future. We do this through our affiliation with a broker/dealer called World Group Securities.
For the past decade or more, Nevada has been an excellent place for business owners to build companies and create jobs for those around us. The favorable tax environment coupled with minimal red tape has created an environment for businesses of all kinds to flourish. My small company paid out close to $2.5 million in 1099 payroll and about $60,000 in W-2 income. This money is used to buy homes, pay property tax, purchase food, purchase automobiles, pay sales tax, and gamble in casinos, all of which creates tax revenue for the state.
The gross receipts tax threatens to disrupt the business-friendly environment that has helped our state grow and prosper over the past decades. I’m concerned that the gross receipts tax will have a negative effect on many businesses in our state. Just the threat of a gross receipts tax late last year caused a substantial client of mine to delay doing business with me. This client stated that if the gross receipts tax passed, he would have to leave the state and do business elsewhere. He also stated he would have to wait until April or June of this year to see whether or not the gross receipts tax passed before he could make a decision regarding a sizeable investment he wanted to make.
[Mr. Jenson, continued.] The loss of that client cost my company in excess of $100,000 profit. That may not be a lot of money to a large company, but to a small business owner, a $100,000 loss of income can have severe consequences. That is just one example. Multiply my negative experience by thousands of business owners across the state of Nevada, and the economic effect could be chilling.
During the past two years, my company’s revenues have fallen from their highs due to the stock market’s three-year decline. Last September we moved to a smaller building and made sweeping cuts to expenses of all kinds. Even though revenue was down, profits rose last year. Saddling the business community with a highly unfair tax such as gross receipts will only prolong this economic downturn. Raising taxes may create a temporary surge in revenue to the government; however, in the long run, higher taxes almost always result in less business expansion, fewer jobs, a smaller tax base, and reduced revenue to the government.
I think we could all agree that we need to diversify the state’s economy. Right now we’re basically a one-trick pony. For the most part, as gaming goes, so goes the state’s economy. Wouldn’t it be nice to use Nevada’s business-friendly tax structure as a means of attracting new and diverse companies to Nevada? How does a gross receipts tax on non-gaming revenues help us diversify our state’s economy? I don’t think it does. In fact, the gross receipts tax will have the inverse effect. By burdening businesses with a gross receipts tax, Nevada will be sending a message to the American business community that we are no longer as open to new business as we once were. At the very least, a gross receipts tax will make businesses considering a move to Nevada think twice before making the move. A gross receipts tax will siphon off profits that would typically be used to expand business and hire new employees and funnel those profits into the bureaucracy.
I heard a study quoted at a Chamber of Commerce meeting that showed the potential cost of collecting the gross receipts tax to be around $30 million, and it could be as much as $50 million by the time everything is implemented. It’s difficult to understand why people are proposing to spend our hard-earned profits to make the government more inefficient. A study by Dr. Robert Schmidt said the Governor claimed that Nevada had a $300 million deficit, but the actual deficit for the year ending June 30, 2003, would be around $155 million, $116 million of which would be for new program enhancements. Why are we implementing new, expensive program enhancements during difficult economic times? I don’t think it makes sense. It doesn’t make sense for me as a business owner to do that.
[Mr. Jenson, continued.] What’s the solution? I leave that in your capable hands. However, a few suggestions may be in order:
1. Spend less money.
2. Increase an existing tax for which the collection mechanism is already in place.
3. Cut expenses.
4. Borrow to cover the shortfall. The economy will turn around and tax revenues will rise again.
5. In conjunction with a slight increase in the existing business tax, increase the gaming revenue tax by one-half to one percent.
Please do not place a gross receipts tax on the citizens and the business owners of Nevada. I ask you to strive to preserve the phenomenal business environment that has made Nevada a great place to live and work.
Dan Meyer, Comstock Gaming, Inc.:
[Introduced himself.] I testified before you a month ago concerning the slot route tax. This is in conjunction with that. What I’m concerned about, again, are the industries that are excluded from this—the power companies, the casinos, et cetera. Mr. Hobbs stated that those industries already paid their share and that the gaming tax would be raised 0.25 percent. My problem is that they have a weighted percentage on the basis of the monies coming in. Their monthly tax is currently not based on a 6.25 percent levy. It depends on their volume. The first amount’s tax rate is 3 percent, then it goes to 4 percent, and then 6.25 percent. I would like to know if that additional 0.25 percent would be applied to all three rates or just to the top rate. In my business, I already pay a higher per-unit tax than the casinos do. Because of the sheer numbers of slot machines they have, they actually get a lower rate than I do. Yet they get a pass on this gross receipts tax, but our industry doesn’t.
I just compiled my last quarterly report and so far, year-to-date, I’ve done a gross amount of revenue just shy of $600,000. My profit on that is $1,132. I deal with monopolies. I have to buy from IGT (International Game Technology) and Bally Gaming and Systems. They are the two largest slot route operators in the state. I don’t see the fairness in this. I agree with everyone who has spoken beforehand against this measure. I have e-mailed you numerous times about consolidation.
[Mr. Meyer, continued.] Assemblywoman Pierce talked about poverty. From everything I’ve looked at, Nevada has one of the lowest poverty rates in the western states. We need to think of this as a region and be competitive in the western region. The problem I have with people who want to throw programs into a weak economic condition is, as my mom would say, if your horse and wagon get stuck in a ditch, you don’t shoot the horse. You have to lighten the burden so that we can keep going.
Historically, as the economy improves, the need for social programs diminishes. That’s the important thing here, not increasing this tax. They’re looking at it from one standpoint; they haven’t looked at it from any other standpoint.
David Rund, President/CEO, Taiyo America, Inc.:
[Introduced himself.] We are a manufacturer in Carson City. We manufacture the best solder mass coatings for printed circuit boards in the world. We are number one in North America as well as number one in the world. [Showed an example of their product.]
Two words describe our company: pride and passion. We are passionate about our products and our community. We have tremendous pride in being Nevadans. An example of that is we’ve had 100 percent voter turnout of our employees in the last two elections.
I’m here to represent our employees and to voice our opposition to A.B. 281 and the gross receipts tax. Our sales are approximately $15 million annually to the electronics industry and we employ 41 people in Carson City. Ninety-nine percent of our sales revenue is generated from outside the state of Nevada. We have 170 customers; 2 of those are in Nevada and the rest are outside the state. We decided to locate in Nevada 13 years ago because of the favorable tax climate and the quality of life that we would enjoy here. By locating in Nevada, we accepted the additional burden and expense of traveling outside the state to our customers.
The lowest wages we pay are double the minimum wage standard. We supplement our wages with an employee profit-sharing plan and a 401k plan. We provide excellent medical and dental benefits to our employees. We patronize local businesses, associations, restaurants, hotels, banks, and the airport with business-related purchases. We volunteer our time to participate on manufacturing-related, community-related committees and associations.
Our employees do not show up on the state unemployment rolls or welfare rolls and are not part of the prison population; therefore, the only service we require from the state of Nevada is that you educate our children.
[Mr. Rund, continued.] To our company, a gross receipts tax would mean the following:
We represent the type of manufacturer that Nevada should be looking to attract to the state, not tax. We bring revenue dollars into Nevada from other states. We provide a higher standard of living for our employees and pump money into the state economy, and we ask little from the state in return.
The ripple effect from a strong manufacturing base is endless. You increase the standard of living for families, and you reduce the strain on social services and education. I would ask once again that this Committee oppose the gross receipts tax and A.B. 281.
Chairman Parks:
Do you have a copy of your testimony?
David Rund:
Yes, I do (Exhibit L).
Chairman Parks:
You indicated you only ask for education for your employees’ children. Do you have a health program for your employees?
David Rund:
Yes, we do have a medical health program. The company pays 100 percent of our employees’ premiums and we pay 80 percent of the dependent premium. In the last two years, we’ve had a 30 percent increase on top of a 15 percent increase in our premiums.
William Freed, Citizen:
[Introduced himself.] I am representing myself and presenting additional information regarding the state of Washington’s tax study. The last five pages of this handout (Exhibit M) is the methodology the state of Washington used. It’s interesting to observe that it is almost identical to that of Mr. Hobbs’ Task Force, yet the conclusions reached appear to be diametrically opposed.
[Mr. Freed, continued.] I regret that Mr. Hobbs isn’t here to perhaps shed some light on this, but he seems to assume, in discussing pyramiding, that the 0.25 percent gross receipts tax will be a constant. As far as I know, that can be changed at any point in time. This Washington state tax study, the section dealing with value added taxes, points out the concepts of horizontal equity and vertical equity. This is important because, in good times or bad times, if we have a fair and equitable tax where no group is taking advantage of another group, lowering the tax rate or raising it will adjust revenue to the state’s demands, whatever they might be.
I would suggest that this be entered into consideration. I would also make two other suggestions to the Committee. One is that we reconvene a committee like the Governor’s Task Force on Tax Policy in the interim between now and the January 2005 session of the legislature. Because time is short, and the legislation passed to raise revenue will probably not be entirely satisfactory, I would also suggest that any revenue-raising legislation have a July 1, 2005, sunset date on it.
I would like to enter those suggestions into the record and then answer any questions you might have. I would be happy to come back at any future time and amplify on value-added tax methods.
Chairman Parks:
I believe there was provision set forth in A.B. 281 to continue the duties of the Task Force on Tax Policy. I think that’s under Section 191. We’ll see to it that Mr. Hobbs and Mr. Aguero both get copies of this material. I don’t know that there are any other questions, but I certainly want to thank you for coming back to today’s hearing.
Doug Busselman, Executive Vice President, Nevada Farm Bureau:
[Identified himself.] We would like to go on the record as being in opposition, based on our policy, to the gross receipts tax. It’s been discussed throughout the afternoon. Those involved in commodity-type activities, including the farmers and ranchers whom I represent, would be very severely and negatively affected by this type of a tax. The gross receipts tax is not based on a business’s ability to pay, and it is very detrimental to businesses that have high income but a low profit margin.
There was some comment made earlier relative to the fact that this was an approach to taxing business, because it was something that prevented the Legislature from having to assess any further taxes on citizens. The folks I represent, farmers and ranchers, are people as well as business people, and when they pay taxes, it’s coming out of their families’ pocketbooks. From that standpoint, this idea that you can somehow avoid having to tax citizens because you can tax businesses instead is not appropriate. I would just like to make the Committee aware of our organization’s opposition to the gross receipts tax.
Assemblyman Marvel:
How many ranchers and farmers might be over the $350,000 gross receipts threshold?
Doug Busselman:
It’s something we could look into and try to figure out, but I don’t know the answer to that.
Assemblyman Marvel:
In the Governor’s bill, agriculture is exempt. [Chairman Parks concurred.]
Ray Bacon, representing the Nevada Manufacturers Association:
[Introduced himself and distributed a handout (Exhibit N).] Assemblyman Griffin asked a question about what happened with the manufacturing rate that caused the drastic decrease in manufacturing jobs in the state of Washington. There are multiple things in play. Part of it’s the general recession, part of it’s the dramatic increase in the competitiveness of Airbus because of the massive subsidies that are taking place, and part of it’s the decline in forest products as related to whatever thing we’re protecting this week.
The specific question he asked was what happened in the tax shift. In the 1998 or 1999 session, Washington did make a major renovation on its gross receipts tax. It had an up and a down impact on manufacturing. It went from 140 different rates down to about 20. At one point they dropped it all the way down to about 3 rates, but they’re now back up to about 20. The overall net impact was fundamentally that they wound up with the companies paying about the same.
Assemblyman Marvel:
What does it cost for them to collect all that tax? Do you have any figures on administrative costs?
Ray Bacon:
I don’t have any numbers as far as administrative costs, but I know the number of employees in the Department of Revenue is right at 1,400. Compare that with about 220 in our Department of Taxation. Their economy in general, the number of businesses, is between three and four times our size. They’re bigger, but they’re not seven or eight times bigger.
Chairman Parks:
Does anyone else wish to speak? Not seeing anyone, we are adjourned [at 4:42 p.m.].
[Prior to the meeting, Ted Zuend distributed a work session document, Exhibit O.]
RESPECTFULLY SUBMITTED:
Terry Horgan
Transcription Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: