MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
May 8, 2003
The Committee on Taxationwas called to order at 2:18 p.m., on Thursday, May 8, 2003. Chairman David Parks presided in Room 3142 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. David Parks, Chairman
Mr. David Goldwater, Vice Chairman
Mr. 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:
Mr. Bernie Anderson
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
Kyle Wentz, Senior Page
Mary Garcia, Committee Secretary
OTHERS PRESENT:
David Schumann, representing the Independent American Party
Carole Vilardo, representing the Nevada Taxpayers Association
Chuck Chinnock, Executive Director, Nevada Department of Taxation
Chip Lindloff, Area Vice President, Adecco Employment Services
Chairman Parks:
Good afternoon. I would like to call the Assembly Committee on Taxation to order. [Attendance was taken.] I apologize for the lateness of the hour. It is getting close to the end of the session, and all kinds of other things seem to be occurring. Today we had scheduled to handle those portions of A.B. 281 that dealt with the insurance premium tax, exemptions, and collection allowances.
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)
What I would like to do is start off with the insurance premium provisions and find out if there is anybody that would like to come forward and speak to those. They are included in Sections 182–184. Good afternoon, Mr. Schumann.
David Schumann, representing the Independent American Party:
Good afternoon, Mr. Chairman and members of the Committee. [Introduced himself.] I would like to ask the Committee to please consider the multiplier effects of something like an insurance premium tax. It sounds simple enough; you are going to charge a tax on an insurance premium, but think, if you are someone who rents apartments, as I do. I am going to pay that tax, and then I am going to add it to the rent that my people pay, and their cost of living is going to go up. Along the way, my broker is probably going to get a little profit on it, and I am going to calculate the interest on the money because I have to front that thing, and then amortize it over the years. So, yes, I am going to stick a little something on it, too. As it goes through the system, it multiplies.
I brought along with me a very timely article that appeared in the Wall Street Journal yesterday [Exhibit C]. The Federal Reserve Board, at its meeting two days ago, all of a sudden found that we are facing deflation. They have announced that and made it public. I will give you all of this so you can consider that. Deflation. Now, when you have deflation, the constrictive effects of federal and state taxes get multiplied even more.
I am going to point out the multiplier effects of these various taxes you are putting on here, how they will come out larger in their effect on the economy than just the amount the state will receive. The negative impact on the economy of the state will actually be larger than what the state receives in income. I really wish, now that we have settled the issue of the inverse relationship between the amount of money you spend on education and the academic results achieved thereby, that we could think about maybe reducing some of these expenditures and not having to have any tax increase at all. Thank you very much, sir.
Chairman Parks:
Thank you, Mr. Schumann. Are there any questions for Mr. Schumann? Is there anyone else who would like to speak this afternoon in regard to Sections 182–184, dealing with the insurance provisions?
If nobody has any comments, then let us move forward to discussing one of the other areas, that of exemptions. I know there has been a fair amount of discussion with regard to the fact that we have a number of exemptions, especially on the sales and use tax. I wanted to give an opportunity for comments to be heard relative to trying to broaden that tax base by reviewing and possibly reducing some of those exemptions. Ms. Vilardo.
Carole Vilardo, representing the Nevada Taxpayers Association:
[Introduced herself.] As a general statement, if the Legislature decides that an exemption or abatement or exclusion from the tax serves a valid policy position, then so be it. We would make some recommendations that go a little further than just how we think we should be looking at exemptions. I would make a recommendation, number one, that any future exemptions sunset after 8 years. It is the only way I know of to force a review to make sure the policy that allowed the exemption to be created in the first place is still valid. In some cases the exemption timeframe should possibly be shorter than that, but it should be 8 years at the most.
That would also give you the ability to set up some provisions whereby you can monitor whether the exemption does what you thought it was going to do to begin with. Relative to the current status of exemptions, of which we believe there are way too many, a systematic review is required to determine what the policy issues are, if they are even valid anymore, and if anybody can explain why they are used. There is one property tax exemption that I believe is a public theater provision. In the statistical abstract there is absolutely nothing that indicates it has been used in 20 years, if even then.
If the Chairman will allow me, I would like to go to another section of the bill that you do not have up for discussion today so that I can explain this. [Chairman Parks gave his assent.] The bill provides for an oversight committee. In fact, it provides for the re-creation of the Task Force to monitor the implementation of the various provisions. I would like to suggest that the way the oversight committee is constituted be totally changed. The oversight committee should be given a specific charge to come back with absolute recommendations.
[Ms. Vilardo, continued.] Having reviewed the exemptions, the Task Force, in fact, did a compendium of all sales and property tax exemptions. They are out there for everybody to look at. It might not be a bad idea for some of the legislators, in the interim, to look at these exemptions to get a feeling for them, because some of them are policy issues, and they may still be viable.
To that end, I would think that your oversight committee should be changed. I would respectfully suggest that the oversight committee, in fact, be constituted primarily of legislators. I think there are some issues that are best served by having the legislators, who will have to come back next session and request laws and enact laws, see that we are implementing whatever we did in the most efficient, effective way possible. If you have exemptions you want to remove, at least having legislators on the committee allows that understanding when you come into committee.
I would further recommend that, as a possible suggestion for reconstituting this committee on oversight, that you look at including the chairman of the Task Force, because of his historical knowledge; possibly the chairman of the working group; 2–3 members of the Assembly and Senate, who could come from the Taxation Committees; and the Director of the Department of Taxation, because he will be involved in administering and implementing some of these issues, and to see how these things are working. I think it is important to have that person available or as a designee to give you the specific information. Then I would suggest including somebody from the Department of Administration.
That being said, I believe that the exemption issue should absolutely be one of the charges that go to the oversight committee. I think if you have that as a charge, given the work that was already done by the Task Force in identifying the exemptions, you will be able to come in with some recommendations. I would ask, as a further amendment, that you do not put in any future exemption that is open-ended, but that you force the review by putting a time limit on it. I will be happy to answer any questions if I can.
Assemblyman Mortenson:
Carole, since the Nevada Taxpayers Association invariably recommends or does not recommend any sales tax exemptions and such, just let me ask you one thing. Do you generally recommend having exemptions on those such as food, prosthetics, things that are absolutely necessary for life?
Carole Vilardo:
Number one, I do not ever remember where we have recommended an exemption. We have testified to them, and, if we believe that there is a public policy issue, we have tried to identify that, but I do not know that we have specifically supported very many exemptions. That being said, the Association did not support the removal of food from sales tax base. We did not because that is a stabilizing factor. I think everybody on the Committee understands that our sales tax base is exceptionally narrow. Removing the food provision removed the one stabilizing factor we had.
I was not with the Association at the time the removal was made, so I can only go by the records of the Association, but it is interesting that what we thought would be viable was what was recommended. Because sales tax is such a potentially large and, at that time even growing, revenue source, what the Price‑Waterhouse study recommended was that if you restructured to put food back on, which we all know is not going to happen, you would create a provision for people to apply, based on income, to effectively get that sales tax back. Such a provision would be parallel to the one we have right now for the renters and property owners’ rebate based on income. It becomes a complicated method, no question about it, but there is an interesting point to it, too. The broader the sales tax base, the lower the rate that you can have, so you do minimize some of the impact.
Assemblyman Mortenson:
But Price-Waterhouse also said we had an extremely regressive tax and criticized sales tax as being very regressive.
Carole Vilardo:
It has been a couple of years since I have gone through the whole report, but, as I remember from reading that section, they recommended going back to the base, although they acknowledged the potential regressivity of adding food back on. As memory serves, at that time we had not removed prosthetics from the sales tax, and their emphasis was on food.
One of the things they said is that we had a regressive tax system insofar as we were the most heavily earmarked tax system, which allowed no flexibility for local governments. They spoke about regressivity in sales tax, but that was the reason they mentioned having an offset credit that people could apply for based on income levels. I remember reading it at that time. It struck me exactly like the provisions we have in NRS 361, which were moved last session over to the Aging Division of Human Services, which provided a rebate up to $500 on property taxes, both for renters and property owners.
[Ms. Vilardo, continued.] Taxes are a balancing act. They are going to be regressive to somebody. It is almost impossible to say that you have the most perfectly progressive system, because that is like saying you have a perfect tax. If there was a perfect tax, one that was truly 100 percent progressive, every state would use it, and they would not only use it, they would use it in the same, exact manner. Property tax, which is frequently cited as an excellent tax, not only from the standpoint of stability, but because it represents the benefits received by the person paying the tax, is imposed in all states. There are at least 32 different versions as to the way it is applied. If it were perfect, it would be applied one way. We have one version no other state has, and that is depreciation. Taxes are very, very difficult. We can make a case for them being absolutely progressive or absolutely regressive based on philosophy, but the point is, at some time or another every tax is going to be regressive to some segment of the economy, whether it is large or small.
Assemblyman Mortenson:
I cannot remember the exact wording, either. I just remember they said we were very regressive. I can remember the District of Columbia study, which listed us as next-to-the-least progressive, and they blamed our high fees and our high sales tax.
Carole Vilardo:
I have a problem with certain aspects of the D.C. study. The study has to be done by Congress annually, and it is a base justification for how Congress funds them, so in my opinion there is a little skewing of those numbers, but, be that as it may, we absolutely have a very high sales tax. We rank within the highest of sales tax, but that was a deliberate policy decision made by this Legislature in 1981 when they were determining if property tax or sales tax was more onerous and more regressive to the individual as it was being applied. It was felt, because of the amount of exporting that was done on sales tax, and the fact that we did have a very narrow base on our sales tax, that we would do what was known as the shift, or in some opinions the shaft, on sales tax.
The other reason that we are frequently considered as having a regressive tax structure is the fact that we do not have an income tax. There is a theory that you cannot have a progressive tax structure unless it has an income tax base. The irony of that is the fact that our voters approved excluding personal income taxes from that base, and to have a viable base, you have to include individuals. The other problem that this Legislature is wrestling with right now is the issue of stability. In looking at the issue of stability, the income tax, particularly on the corporate side, has proven to be the most unstable of all the revenue sources that the states have.
Again, there is not a perfect system. You have to try to craft something that works for your state’s economy and that benefits, to the greatest degree possible, your state’s residents and businesses to keep them economically healthy. Thank you for allowing me to make that speech, by the way.
Assemblyman Mortenson:
I have great respect for the Nevada Taxpayers Association, but they do come from the point of view of business, not necessarily the citizen.
Chairman Parks:
Thank you. If I might just go back for a moment to your previous comment relative to the oversight committee, under Section 191 of A.B. 281, there is the creation of the Task Force on Tax Policy. Needless to say, it indicated that you have two members appointed by the Majority Leader of the Senate and two members appointed by the Speaker of the Assembly. Are you recommending that this be the committee that deals with the exemptions, and that this be the committee that is, you said, made up with a significant number of legislators?
Carole Vilardo:
In response to that, Chairman Parks, I am recommending that you amend that provision to reconstitute the makeup of the committee, and then add to the charge in here. My amendment would literally change it to an oversight committee on tax policy and then restructure its makeup. Mr. Chairman, I did tell the Chairman of the Task Force, because I have worked closely with him and I presented a lot of information to the Task Force, that I was making this recommendation, so it would not be a surprise to him.
Chairman Parks:
As an individual who has volunteered thousands of hours to this effort, I am sure that it might almost be a great relief to him. I just wanted to clarify that in your mind that you were not envisioning two separate committees. Thank you.
We were on the topic of exemptions. Is there anybody else here who would like to speak to the issue of exemptions? I see we have representatives from the Department of Taxation. I do not know if they have any thoughts that they would like to impart to us relative to their handling and dealing with exemptions.
Chuck Chinnock, Executive Director, Nevada Department of Taxation:
[Introduced himself.] I do not have anything prepared on exemptions. My only other comment would be that in preparation for streamlined sales tax, any look at the exemptions would be a worthwhile venture. That is all I have to say on the issue of exemptions at this time.
Chairman Parks:
Thank you. If there are no further comments with regard to exemptions, I think we have heard previously a discussion on collection allowances. Collection allowances are not specifically enumerated in sections of this bill. However, they are certainly something that has been discussed in the past. We know that we have varying amounts on varying revenue sources. I think the highest amount is 3 percent. I thought that we ought to at least offer an opportunity for comment to be received relative to that issue, because it does result, to some extent, in a fairly significant amount of revenue.
Assemblyman Hettrick:
I appreciate the opportunity to comment on this. I commented on this once before in one of the joint hearings. Given the fact that we are doubling the tax on cigarettes, and, if we followed the Senate, I think we would double the tax on alcohol, the collection amounts double for the companies that are presently collecting the money as well, but the work does not get any more difficult. It is the exact same amount of work; it is just twice the money for doing it.
I think we should adjust that in this bill when we finally pass whatever is passed here. If we end up doubling those two taxes, we should either halve the collection allowance or do something like that to make the collection fair. Otherwise, we are just creating a windfall. The numbers that I generated were something in the neighborhood of $2.5 million per year in additional collection allowance for doing the exact same job. The only thing that changes is the formula.
Chairman Parks:
Thank you. Would you like to comment on the fact that some of them are as much as 3 percent? I do not know that the difficulty in reporting on the forms is twice as difficult.
Assemblyman Hettrick:
Yes, Mr. Chairman. I commented on that as well. Mr. Chinnock was there and testified to the fact that, at the time, he was going through a list of taxes. We commented on the collection allowance for most taxes, and of course most taxes do not have any. A few have 1 percent; I believe sales tax allows 1 percent or something like that. The alcohol and cigarette tax is 3 percent. Could it be reduced? I would think it could.
If it doubles, and the doubled amount would be $2.5 million, it means that we are allowing somebody $2.5 million right now to collect the tax. That seems like an awful lot of money for two employees, or one employee per firm for making five or six firms that are dealing in wholesale cigarettes and alcohol in this state. I do not know what the numbers are, but it seems like an awful lot of money compared to what we allow for other things.
Assemblywoman McClain:
Just for a point of clarification on Section 187, is that just for cigarette and alcohol taxes, or does that cover more than just those two? Then I have a comment.
Ted Zuend:
There are several provisions in A.B. 281 that address collection allowances. Neither addresses the issue Mr. Hettrick has raised. For example, Section 88 provides for a retailer collection allowance, and I believe it is also repeated for the local school support tax. Section 90 would provide for the collection allowance only upon timely payment of the taxes due. Right now, even if you are late paying the taxes, you still get the collection allowance.
The provision that Ms. McClain is referring to actually has to do with the presumed new tax on amusements that is included in Section 50. Section 187 simply amends that section later to conform to what was being done for other sales taxes under the theory that a tax on amusements simply would be another sales tax. There is actually a provision put into the original section, in Section 50, where it said, “1.25 percent,” and then it is later changed to “1.25 percent, only if it is paid within 7 days, or 0.75 percent if it is paid by the due date.” Does that help?
Assemblywoman McClain:
Thank you. I guess that is what I wanted to clarify, because if we are going to allow different rates on different types of taxes for the cost of collecting and reporting and remitting, I do not want to see stuff like this where you can keep 1.25 percent if you pay it within 7 days, but if you wait until the last day you still get a break on it? Come on. I can see giving them a little break if they are early, but not if they are paying it on the day it is due. Pay the whole thing; you do not get a double whammy out of this.
Chuck Chinnock:
I am passing out a short paper that presents information on the collection allowance [Exhibit D]. If I could, I will go through that. It shows some numbers and what the basis is for the various collection allowances for the various taxes.
Paragraph one shows that the sales tax collection allowance is 1.25 percent. It shows the various statutory authorities for the various taxes, beginning with the base sales tax up through the local school support tax, the basic supplemental city and county relief taxes, and also for the county option taxes. The total amount allocated for the collection allowance was $28.7 million, $8 million of which was the General Fund portion.
[Mr. Chinnock, continued.] The reason that that 1.25 percent collection allowance is provided is to the retailer, acting as an agent of the Department of Taxation, to go ahead and collect that tax. The collection allowance on the cigarette excise tax is 3 percent. The way that is worded in statute is the “stamp-affixing fee.” It shows the reference there. It was reduced from 4 percent to 3 percent back in 1991. The amount that is retained is $1.8 million, of which $1.3 million was the General Fund portion. The liquor excise tax is 3 percent. That was increased from 2 percent to 3 percent back in 1961. The annual amount for that is $588,000, of which $512,000 represents the General Fund portion.
I went ahead and showed some various options that could be considered with respect to tiering or allocating different rates that could be applied. The type of tiering that is shown in A.B. 281 is what the first one is, where you have a higher rate if it is filed early, a lower rate if it is filed on time, and if it is filed late, then of course it would be zero percent. That would be very difficult for the Department to administer, and I will talk about that when I get to paragraph 3. The second methodology we discussed that would be possible is to pay one rate if filed by a certain deadline, by the end of the month, and no allowance if it was late. I gave some potential rates that could be considered there.
The third possibility might be, and there is some reference to this in A.B. 281 and some of the other proposals, for electronic filing. Perhaps there could be a consideration that if you filed electronically, you could get one collection allowance. If you mailed it in on time it would be another, and if you were late in any case, there would be no collection allowance. That is what the third proposal is. When I get to the fourth bullet there, and you see the references to a, b, and c, when I talk about “if 1,” I am talking about the first proposal; “if 2” means the second proposal, and “if 3,” the third proposal.
There was some discussion about putting a ceiling or threshold in there. With that in mind, I gave some sample thresholds that could be applied. You might want to look at the second-to-the-last page, which shows the distribution of collection allowances based on the amounts of taxable sales that we collect in any one month. As an example, you can go down and see that in the area of $500,000 to $1 million collection, we have over 1,000 accounts that we collect in that one category. You can see what the distribution is of the various accounts that we have. That will give you some idea, if you wanted to set some kind of threshold or ceiling in there.
[Mr. Chinnock, continued.] The other comment I would make there is that we presume, as is shown in A.B. 281, which is probably the only way we could really implement it, is that you only look at it month by month. You can see that you might have a taxpayer who is current one month and not current in another month, so the month that he is current, you would give a collection allowance, even if he had been delinquent in prior months. What I wanted to do in paragraph 3 is just let you know that under the current system, and with respect to the lock box, both the existing lock box and the one we will go to, it is a pretty labor-intensive process. In order to determine what is late, we have to save the envelopes of those that are late. Then, once we receive and process those envelopes separately, we have to archive those.
Under the current system, we process about 1 to 1.5 million filing forms per year. If we were put into a three-tier system, we would basically end up having to track and maintain all of those envelopes. It could be done, but it would be an immense workload. We would probably be going from tens of thousands, or a few thousand, up to millions that we would have to retain. If you had a tax such as a services tax or some other tax in addition to that, you would end up, in the worst case, maybe quadrupling that type of workload.
As far as implementation timeframe, we think we could implement an on‑time/late system, and then when we got electronic filing, if there would be some provisions for that, quick, relatively easily except for one thing. If we had to do that up front, then something else would have to give. So, our proposal for your consideration would be to leave status quo until July 1, 2004. At that time, we believe we could implement an “on time, you pay one rate and if you are late, no rate” system. Then, by July 1, 2005, realizing that we would have new information technology on board, we could do something in the range of electronic filing also at that time. That is all I have, unless there are some specific questions that you might have about the information that I presented.
Assemblywoman McClain:
When I send in my mortgage payment and my Visa card payments, they do not care when I postmarked it. When they get it is what counts. Maybe we do not care when they are sent. Maybe what we care about is when you get them, and you date-stamp them when they come in.
Chuck Chinnock:
That is always an option. There are some provisions, but not with respect to the taxes. We have always looked at the postmark as far as being received.
Assemblyman Mortenson:
Ms. McClain, with all due respect, I really do not like that idea. I think there are some seedy organizations around, especially some insurance companies, that I swear would throw it in the in-box and wait a little while before they stamped it.
May I ask why you have a 3 percent collection allowance on cigarettes, whereas you just have the 1.25 on sales tax? Is it more difficult?
Chuck Chinnock:
I can only say the 3 percent on the cigarette excise tax is a fee that they retain because they affix the stamp to all the separate cigarette packs in addition to sending the tax to us.
Assemblyman Mortenson:
Okay, I understand. My next question is, do all states allow a collection allowance like we do for sales tax?
Chuck Chinnock:
I am not sure. I know Carole Vilardo is going to follow me, and she can probably answer that better than I can.
Assemblyman Mortenson:
I have run a business for a jillion years, and every time I fill out that form, it irritates me that I have to go up and get my calculator, come back, and punch it out. It is more trouble than it is worth. I just wonder whether or not that collection allowance takes a calculation every time. I am sure for big businesses it is a lot of money, but for small businesses it is a pain in the neck.
Ted Zuend:
I just wanted to point out that the provisions relating to the three-tiered system would not go into effect, according to the final section of the bill, until July 1, 2005. I believe that was included that way because they understood that Mr. Chinnock’s Department would have problems implementing any sort of a tier system under its current collection system, through the Automate Collection Enforcement System (ACES).
Chairman Parks:
I had one question. Could you address the issue of electronic collection and reporting? If you were to move forward, would you not try to move toward that type of system that would be fully automated?
Chuck Chinnock:
Yes, sir, Mr. Chairman. With bringing information technology on board, we have two plans. Our current plan with our imaging and scanning program is to do kind of a poor man’s filing for a couple of the taxes. The intent was to do it for sales and use tax and business tax. We are working on that right now, and are hopeful that it is going to work. We think it will, but our true plan for our information technology is that we could have electronic filing and electronic registration, plus any new taxes that came on board. We would have priorities for other programs after that. If we were to be provided the resources and funding for that, it would be one of the up-front returns on investment.
Chairman Parks:
Thank you. I have one final question. As far as your staff resources go, how much time do you estimate is expended in dealing with errors that may be reflected in that? I am sure the first thing you have to do is verify that the remittance is correct. Do you have a high incidence of erroneous reporting? I do not mean fraudulent; I just mean simple mathematical error.
Chuck Chinnock:
I am not sure how to answer that. Because we do have an automated system with respect to sales and use tax and business tax, even if they incorrectly put down the wrong numbers, after we go through and input that into our screens, it does compute it correctly, and we would then make a correction to that. If there was a wrong amount submitted to us, then there is a process by which we go back. As far as the actual numbers of errors, I do not have with me the percentage of errors that we do have.
Chairman Parks:
I was just trying to get a sense or a feel for what it might be like. [Mr. Chinnock said he would get the information to Chairman Parks.] Thank you.
Carole Vilardo:
We are supporting a change in the collection allowance. However, I do understand what Mr. Chinnock has said, and I have received some calls from accounting members of ours that handle business. They have made a recommendation that I think is workable sooner than July 1, 2004, because it would be changing one line on the form. That would be to reduce the collection allowance to 1 percent from 1.25 percent at this point. If the Committee should choose just to wait until the capability is there, or until the July 1 date, assuming that the Department will have the transfers on, I would still encourage the Committee to amend the existing language that currently allows a collection allowance to be paid when the payment is delinquent. That is almost insane, because you are allowing the allowance, but putting a 10 percent penalty and interest on it. There is a terrible problem with that, and that is something that I believe could be corrected by the legislative change at this point that would be effective immediately.
[Ms. Vilardo, continued.] We would also oppose anything other than a postmark date at this point, the reason being that if you were to rely on when it is received by the Department, this is a case where possibly it is due on a Saturday or Sunday. It shows up on Monday. Then you need to change the law. Every one of us has experienced, at least once in our lifetime, a bill that did not get received in time, even though we posted it in time, because there was a problem. This is the reason that we have been arguing since 1995 to get the Department the necessary computer equipment so that there would be the efficiencies of collection and you would be able to make some of these changes for somebody filing.
I do not know if Mr. Chinnock is aware of this, just because it happened 2 or 3 years ago this summer, prior to him becoming a director, but there was a clarification through an Attorney General’s Opinion (AGO) on sales and use tax and when you are entitled to a collection allowance on use tax. You are entitled, according to the new opinion, to a collection allowance on use tax when you act as a collector of the tax for the state. If you are just paying the tax because you made the purchase without tax, it came in from out of state or whatever, you are not allowed to have that allowance.
Because our system is a little antiquated in what it can and cannot do, the necessary changes to explain this on the form cannot be done. The Tax Commission actually had to instruct the Department not to enforce that AGO. We are losing anywhere from probably $4 million to $9 million dollars on the collection allowance alone because we do not have the capability of doing what we need to do. This was part of the whole thing on passive revenue generators that we were talking about. Anything that is done to get that equipment into the Department and allow that integration is extremely important.
Also, the reason the fuel tax allowance is higher, at least from my reading on this, has been because there was an evaporation point on fuel, and that was in consideration for that fuel that might evaporate, which you would never collect any revenue on. Cigarettes are even more involved than taking and opening the carton, affixing a stamp to each of the ten packs, closing the carton, because you are required to do that in what is known as “in bond,” which is a secure warehousing facility. That is the reason for the level of that collection allowance. Any other adjustments you want to make I cannot truly speak to.
Assemblyman Mortenson:
Carole, do you happen to know whether all states offer a collection allowance or not?
Carole Vilardo:
Not every state does. I can give you a listing of all the states that do. I believe we are now at 38 states. What has happened, as near as I can see from the different reports I have received over the years, is that states have viewed the collection allowance as a revenue grab that nobody knows about, except for the business that now does not get the money. The number of states has gone down judiciously because of the fact that we say sales tax is for the privilege of doing business. For the privilege of doing business, we get to post bonds, and we get to be audited, ad infinitum. In effect, we make an accommodation much like we do with the assessors, who take a motor vehicle privilege through the registrations for DMV, who are allowed 6 percent as a collection allowance. I will give you the list. I would urge you not to eliminate the allowance, but that is also because I have an old retail mentality on this.
Assemblyman Mortenson:
You said thirty-some states are collecting or not collecting?
Carole Vilardo:
Thirty-eight states allow. I have got a new book in. I believe the collection allowances go as high as 2, possibly 2.5 percent on sales tax. I will provide that for the entire Committee.
Because there was the discussion about electronic funds transfer, even though we are not on that section, there is a provision in this bill, in Section 167, that requires the Department of Administration to adopt regulation for electronic submission of returns and payments, allowing electronic funds transfers, debit and credit cards, and electronic reporting. I would like to suggest there is one agency that is equipped at this point that can do electronic funds transfers, and that is gaming. To the best of my knowledge, when I checked last fall, it was voluntary.
The reason for making these recommendations and shortening timeframes was because with the electronic funds reporting, the float time is lost by the business. It is gained by the state, allowing the state to at least achieve greater interest rates on their daily investments. You get revenue without increasing anybody’s tax, and it becomes an offset to what you might need.
Chairman Parks:
Thank you. Is there anyone else who would like to speak with regard to any of the issues we have discussed already today, which include the insurance premium tax, exemptions, or collection allowances? Not seeing any, Mr. Lindloff, we would appreciate hearing from you at this time.
Chip Lindloff, Area Vice President, Adecco Employment Services:
[Introduced himself and distributed a handout, Exhibit E.] I have come today to speak briefly on the impact that this bill may have on temporary staffing. Adecco is the largest temporary staffing company in the United States, and the nation’s third-largest employer. We employ over 600 Nevada residents annually from several business locations in Reno and Las Vegas. Among these employees are former welfare recipients, individuals reentering the workforce, retirees, single parents, minorities, and women. A great number of these employees work with companies conducting business in the light industrial, manufacturing, distribution, retail, professional, banking, and other sectors. Last year, we paid wages to Nevada residents in excess of $1 million.
I am speaking to ask this Committee, which would impose an excise tax on Nevada businesses, to consider that such a tax would have a significant impact on the staffing industry that would have a ripple effect throughout the Nevada economy. Taxes on staffing services are a tax on jobs and wages. Industry studies show that by increasing the cost of staffing services, a tax will reduce the demand for those services and put temporary employees out of work or reduce their wages. Temporary staffing businesses generally operate at low margins. An excise tax like that proposed by A.B. 281 will erode that margin and make it difficult for Nevada temporary staffing firms to remain in business.
The negative effect on those who rely upon temporary staffing businesses for employment, as well as the effect on businesses that rely on temporary staffing to meet their operating needs, would be significant. The effect of the excise tax on staffing businesses will also ripple throughout the state economy. Support services associated with providing temporary help, such as telephone service and other utilities, will also be affected, and the tax will cut jobs in those industries as well. The dampening effect of such higher unemployment on consumer spending will likely offset much of the anticipated tax revenue.
In addition, the cost of goods and services generated by Nevada businesses would increase, resulting in a higher price for those goods and services compared to their cost in other states where staffing services are not taxed. The result would be the erosion of market for goods and services produced in Nevada while strengthening the Nevada marketplace for goods and services produced by out-of-state companies.
[Mr. Lindloff, continued.] A reduction in the availability of temporary jobs will also make it more difficult for those transitioning into the marketplace, specifically the unemployed, to gain valuable work experience. The effect on Nevada’s ability to attract and retain skilled workers is clear. The negative impact of an excise tax on staffing on the overall economy also will make it harder to attract workers and businesses to Nevada. This will put us at a serious competitive disadvantage relative to the great majority of states that do not impose taxes. Adecco appreciates the opportunity to speak today.
Additionally, I would like to summarize a couple of specific impacts that this would have on Adecco here in the Reno and Nevada markets. In the first quarter of 2003, our revenue was approximately $900,000 in the Reno market. Conservatively, that would annualize out to about $3.6 million. We would pay an annual tax of about $9,000. If we annualize out our pre-tax profit, that represents about a 50 percent cut in our profit.
Staffing firms permit businesses to manage their labor costs more effectively, providing them with flexibilities and the means to remain competitive. Adecco finds itself in a position in reviewing its customers’ books that sometimes allow for a 70 percent allocation of costs of their product to labor, which is a great deal attributed to us. Small businesses often rely on outside firms to provide them with accounting, bookkeeping, secretarial, legal, advertising, and other services, many of which are provided by staffing companies like Adecco. Adding a tax to our gross receipts means that we would have to pass along the increased cost of doing business by raising our prices. Our clients are mostly small businesses in Nevada, and that would have a negative impact as well. Thank you.
Assemblyman Goldwater:
Do you mind running through the numbers again with me that you put out for your profitability and tax?
Chip Lindloff:
Certainly. For the first quarter of 2003, our annual revenue was at a run rate of about $3.6 million, approximately $900,000 per quarter. We would pay an annual tax of about $9,000. Our first quarter pretax profit was approximately $4,500, or $18,000 for the year.
Assemblyman Goldwater:
So, on $3.9 million worth of revenue, you are only profiting $18,000?
Chip Lindloff:
That is correct on the current run rate with our numbers, yes, sir.
Assemblyman Goldwater:
Are you a publicly traded company?
Chip Lindloff:
Yes, we are. Hard to believe, is it not? [Mr. Goldwater commented that that was interesting.]
Chairman Parks:
I have one question, if you could just take us through this relative to the service that you perform and the costs that you pick up. You hire employees and then you turn around and fill vacancies for an employer, so you provide them with the labor pool. [Mr. Lindloff indicated that was true.] Is it mostly casual labor?
Chip Lindloff:
It is very customer- and industry-specific. For instance, in the warehousing and distribution markets here in northern Nevada, we are very much at a slow season right now, but as hospitality picks up and people start to come into the city, we see much larger numbers than what we currently have. Most of our associates that come through us are people that, for one reason or another, may choose to go to temporary work because they do not want to work 12 months out of the year. They only want to work 8 months out of the year. However, we do have clients that have a contingent work force that works 40 hours per week indefinitely for 1, 2, 3, 5, or even 10 years, so it is across the board on how we service each client.
Chairman Parks:
For each of those individuals that you provide to a client, you handle and you pay all the benefits that are required by state law?
Chip Lindloff:
That is correct. All of the worker’s compensation, state and federal taxes, and so on become our burden.
Chairman Parks:
So, if I were an employer, I would contract with you to, say, furnish me security officers for $8 per hour or something like that, and then you would find me a pool of persons to do that work. [Mr. Lindloff said that was correct.] So you are funding all the costs relative to unemployment insurance and withholding that are necessary. [Mr. Lindloff again indicated assent.] Okay, thank you.
Assemblyman Grady:
Could I ask Mr. Chinnock question? I need some clarification. Local governments pay approximately 0.75 percent to Taxation in the collection of taxes. It is my understanding that that pays for part of the operation of the Department, but a large amount of that money is transferred directly to the General Fund. A few years ago it was something like $13 million. Can you refresh my memory on how that works?
Chuck Chinnock:
The state does charge a General Fund commission for the collection of the various sales taxes that are distributed to the counties. It is 0.75 percent. As far as the amount that goes directly to the Department, I cannot speak to that. I do not think it is earmarked directly for the Department; it just goes to the General Fund.
Ted Zuend:
Yes, the 0.75 percent goes directly to the General Fund. Mr. Chinnock’s operation, by and large, is funded through appropriations from the General Fund.
Chairman Parks:
Would anyone like to comment to the Taxation Committee before we adjourn? Not seeing anybody, we are adjourned [at 3:22 p.m.]. Thank you very much.
RESPECTFULLY SUBMITTED:
Mary Garcia
Committee Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: