MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
May 27, 2003
The Committee on Taxationwas called to order at 2:14 p.m., on Tuesday, May 27, 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. 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:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
June Rigsby, Committee Secretary
Mary Garcia, Committee Secretary
OTHERS PRESENT:
Chuck Chinnock, Executive Director, Nevada Department of Taxation
Chairman Parks:
I would like to call the meeting of the Assembly Committee on Taxation to order. [Attendance was taken.] There are couple things I would like to do this afternoon. We received a report from the Department of Taxation in regard to informational technology cost estimates. I would like to have a brief presentation from the Director on that issue. Then, I would like to go into the area of passive generators, or collection allowances, and discuss that.
Chuck Chinnock, Executive Director, Nevada Department of Taxation:
[Introduced himself.] I hope everybody did have an opportunity to have a copy of the report (Exhibit C). This report was completed by the Department of Information Technology (DoIT). They worked several weeks with us in identifying our business processes so that they could eventually come up with a budget estimate for system acquisition and development of information technology for the Department of Taxation.
The large reason for this was to replace our current Automated Collection Enforcement System (ACES), which automates sales, use, and business tax. The rest of our taxes are pretty much desktop systems, and are hand systems. The proposal would also automate all the other taxes we have. Additionally, it would provide us case management. It would provide us a Web-based filing on all of our taxes, complete billing and collection services, and audit modules, which is in the way of risk-based auditing. It would also provide a discovery module, so that we could identify, from a compliance standpoint, those taxpayers who were not reporting.
In this analysis that the Planning and Programming Section of DoIT did, they looked at two primary methods of accomplishing that. One was using commercial off-the-shelf (COTS) software. The other one was through custom development of software. There is also a note in there that along with any appropriation, which would then lead to an actual Request for Proposal (RFP), there was a potential in that process, depending upon your wishes, to look at alternative funding options.
Based upon that, if there was to be an appropriation, then we would immediately conduct a Functional Requirements Definition. We are preparing for that right now in case it does happen. Along with a Functional Requirements Definition, we are also completing a complete road map, which will guide the functional requirements. Once the functional requirements task was done, that would lead to the actual RFPs. With the RFPs out there, if we shortcut everything and make it as short as possible, we could have a contractor negotiated and contracted, ready to start work as early as January 8, 2004. That is how long the process would take.
[Chuck Chinnock, continued.] The concept would be, if new taxes come down, to implement the new taxes and have them fully on line by January 1, 2005. We also, in our request for information that we sent out to several companies, advised that we needed to have soft returns up front, including the web-based filing for registration and filing of taxes, before January 1, 2005. If you were to take a look at the time flow in this report, we know that to do this properly would take a total of 3 years. That third year we would be transitioning all the information that is in our current ACES system over. That would be the last thing we do.
I can give you a rundown of what the costs are. On page 6, it shows the cost by year. You can see that if you were to add the bottom line total all the way across, it would total $27.1 million for the 3 years to have this full system. For the biennium, for year 1 and year 2, we are talking about $20.4 million for this system.
The appendix on page 9 shows the notional or projected costs, which we determined based on the request for information. When we sent out the requests for information, we had 17 companies actually submit proposals to us, so we had a very good cross-section of companies. We had bids that ranged anywhere from the lower teens to mid-thirties. That pretty much covers it quickly. If there are any specific questions, I would be happy to answer those.
Assemblyman Hettrick:
Chuck, are those figures for writing a custom program?
Chuck Chinnock:
Actually, we had submissions from both companies that do custom development, and also COTS. By taking a little bit of each and seeing what was out there and at what price, I think the RFP would allow either option.
Assemblyman Hettrick:
I know we had talked once before. You were exploring companies that did a start-up where they came in and said, “We will come in and provide the materials, the computers. We will do everything. We will run for a percentage of the collections until we get paid back.” There were a couple of those. One was called AMS, and there were others like that. Where does that fall into this?
Chuck Chinnock:
We did look at those options. A few of the companies, in offering those options, actually offer that option that if you want to pay for it; here is what it is. If you want to do a cost/benefit funding, here is the price, but then this is what we get up front, and then this is what the charge is with interest over time. Basically, it is like an alternative funding option.
Assemblyman Hettrick:
So you think the cost would end up being about the same? I guess the thing about that is if they do that, is that an instant start-up? Are we 3 years out, if someone is willing to walk in and plunk it all down and say, “Here it is. We use it in other states. We can use it here. Yes, you are going to pay us the same amount of money over 3 years, but the day we set the computer down and turn it on, we will start.”
Chuck Chinnock:
I think it is the same timeframe. I think the benefit of a cost/benefits funding is that if you do not want to or cannot expend the funds that are required up front and on an ongoing basis, they are willing to take a look, first of all, at what they can make in cost savings. As a result of those up-front cost savings, they take some of that money as time goes on and then, over time, get the rest of their return. Over the long run, you generally end up spending more money under these proposals. You just spend less up front. As far as development time, it is probably the same development time, because they still have to develop and tailor the system to meet the needs of the state.
Assemblyman Mortenson:
I was talking to someone about a month ago. They were telling me that one state had spent about $200 million on trying to get software operating, and then they found a state that had one that was quite similar. They bought it for $20 million, and it worked like a charm. Is there any possibility there is some commercial software out there that can be just modified slightly and save a lot of money?
Chuck Chinnock:
When you get a chance to read through this proposal, it does recommend that you do go with the option of COTS software that has already been used and proven in another state, and then bring that to this state and modify it to specifically fit the state. It is just not that easy to do, because it still takes a substantial amount of work to go ahead and fit all the nuances for a particular state.
Chairman Parks:
I want to thank you. That was a very enlightening report, and certainly helpful. At this point, what I would like to do is talk a little about the passive generators, the label that we had placed on the various revenues for the collection allowances that are currently in effect. I know that, back at our earliest meetings, when we had joint hearings with Senate Taxation, we had a lively discussion on that, but we have not come back to discuss that since. I think it is also good for us to know that the Senate Taxation Committee has looked at the passive generators. They have had several different recommendations and have made certain recommendations in their Committee.
What we will probably start with is the cigarette excise tax. That is perhaps a little bit different from other taxes. At the current time, the collection allowance for the cigarette excise tax is 3 percent. That is in NRS 370.220, and it is a wholesaler’s discount for stamping. It was previously reduced from 4 percent to 3 percent back in 1991. The discussion that has taken place has been to cut that in half, dropping it to 1.5 percent. There has been further discussion in the Senate as to dropping it down to 0.5 percent. Are there any questions or comments regarding that?
Assemblyman Marvel:
Do you have the figures on how much it would save by dropping it down?
Ted Zuend:
The original action of the Senate Taxation Committee, which anticipated an increase in the cigarette tax rate, which of course would generate more money for those who stamp, first approved a cut by 50 percent to 1.5 percent. That was estimated to generate a little more than $2.5 million over the course of the biennium. They further approved the recommendation to go down to a 0.5 percent rate, which generates approximately another $1.7 million over the biennium.
Their reason for keeping a rate is that there is an actual cost for stamping. It is not a collection allowance, per se. It is something of a commission for the cost of actually putting the stamps on the packages. That is why it was retained. I believe in California it is either 0.75 or 0.85 percent. Of course, California, at this point in time, has a much higher cigarette tax than Nevada does.
Assemblyman Hettrick:
I think the issue is that as the rate goes up, obviously so does the collection, because it is a percentage of the rate. It obviously needs to be adjusted if we are going to do the change in the cigarette or alcohol tax. The question is, and I think Ted did it very well, whether 0.5 percent adequately covers the cost of doing the actual stamping or whether it is something in between. Clearly, we should save as much money as we can by doing it.
Chairman Parks:
My recommendation would certainly be to drop it down to that 0.5 percent to cover the stamp-fixing activity.
Assemblyman Mortenson:
Mr. Chairman, do we have any data from other states to say what they do in this particular case and what percentages they allow?
Chairman Parks:
I do not know that I have anything readily available. I have collected a fair amount of information. Let me quickly see if I have anything on that. I know that we have at least one, if not two, members of the Nevada Taxpayers Association. They may have some knowledge right off the tops of their heads. I think I remember seeing some documentation that showed there were a variety of different amounts that had been charged in different states for collection.
Assemblyman Mortenson:
The 0.5 percent is not really onerous relative to other states.
Chairman Parks:
If I remember correctly, some of the states had no credit for the stamp fixing activity or collection.
Assemblyman Mortenson:
It sounds like it is okay, then.
Chairman Parks:
Let us talk for a moment about the collection allowance for the liquor excise tax. This one, NRS 369.370, is currently 3 percent. It had been 2 percent, but some decades ago it was increased to the 3 percent level. It would probably generate somewhere in the range of $500,000. If we were just to discontinue that, we would see revenue of roughly $500,000.
Ted Zuend:
I just wanted to point out that the Senate has already approved a doubling of the liquor tax rate, which, of course, following the logic that Mr. Hettrick talked about, would double the amount that they would realize if everything else was left alone. From their perspective, then, the amounts that would be generated are obviously double. They eventually would up eliminating the collection allowance altogether, going to zero, because it is a pure collection allowance.
In fact, it is the only such allowance in the statute that actually requires timely payment of the taxes to receive. If you do not pay your taxes in a timely manner, in fact if you do not pay your taxes 5 days in advance of the due date, you get no collection allowance. It is a fairly odd provision that is in statute.
Assemblyman Hettrick:
I wonder if there was any discussion about whether taking away what was essentially an early-pay discount is going to have a negative impact on collections, and if we need to be concerned about that?
Ted Zuend:
I am sure there are penalties for late payment, probably a penalty and interest. Perhaps Taxation could correct me if I am wrong. I believe it is due on the 20th of the month following the month for which the tax is being paid. If you pay it before the 15th, you get to keep the 3 percent.
Chuck Chinnock:
I do not know if you were to remove that whether that would cause people to wait the 5 more days. It is quite possible that they would, but we are talking about a total of 5 days difference from giving them the collection allowance or not giving them the collection allowance. There is a penalty if they are late.
Chairman Parks:
I am thinking that, if there was a late penalty, that would certainly be enough of an incentive to have them pay and make sure that their deposit was properly credited. That brings up another topic, which is to try to do as much as we can through electronic funds transfer, so that we have access to the funds as quickly as possible. The direction we may want to go is to follow the Senate’s lead and reduce the liquor tax allowance to zero.
The next area that we have is that of sales and use tax. The collection allowance there is 1.25 percent. The annual amount that that generates is somewhere in the range of close to $30 million.
Ted Zuend:
Yes, Mr. Chairman, that is correct. That would include all portions of the sales tax, all state and local sales taxes. The state’s interest would be about 60 percent of that because of the state’s 2 percent and the local school support tax (LSST) portion of that. If that rate is changed or even modified, pursuant to A.B. 281, the additional money would accrue to both the state and local government and schools.
Chairman Parks:
It is my understanding that the Senate reduced the collection.
Ted Zuend:
They, in effect, eliminated the retailer allowance. The state portion of it is estimated to be worth $39 million over the biennium.
On cigarettes, of course, you have to understand how it works, because they had proposed a doubling of the cigarette tax, so the net gained by then reducing the collection allowance to 0.5 percent would be, if I can add correctly, a little over $4 million over the biennium. They had proposed doubling the alcohol tax rate. That would come to approximately $2.4 million over the biennium, with the increased rate. That is the savings to the state.
Chairman Parks:
I think for the most part, as far as looking at collection allowances and considering those areas, we covered the primary areas where there would be any sizeable amount of collection allowance granted.
Ted Zuend:
Mr. Chairman, this has been overlooked, but there is a 2 percent discount for other tobacco products that is in statute. Of course, that is not a huge revenue generator in and of itself. I believe it only generates $6 or $7 million per year, so 2 percent of that would not be a huge amount of revenue. However, it is on the books. Depending on what your actions are, logic might dictate looking at that one as well.
Chairman Parks:
Do you know whether or not there are stamps affixed to those products as well?
Ted Zuend:
The tax is on the wholesale price of the product. I do not believe there is any stamp or any particular state insignia on those products.
Chairman Parks:
I agree with you. I think we need to be consistent. If there was such a thing as stamp fixing on those products, we probably would be compelled to allow a minimal fee. Does anyone else have any questions related to this?
Assemblyman Marvel:
Has the Senate actually passed anything out yet?
Chairman Parks:
It is my understanding that the Senate has voted on a number of revenue sources and potential revenue items, but they have not, in effect, passed out a specific bill. My understanding is that they are doing work similar to some that we have done on the Assembly side, and they are just taking each one of the taxes and creating a module for that tax based on the actions they have taken.
With regard to other areas, I do not see that there are any further areas with anything major dealing with collection allowances. Unless someone in the audience knows of one that we should be considering, I guess that pretty well concludes what we need to cover on collection allowances. The comment came up regarding gasoline. Of course, all that goes into the highway fund.
Ted Zuend:
That is not a collection charge, per se. It is a 2 percent shrinkage allowance, with the idea that the amount coming in to the vendor and the amount going out from the vendor in sales differ because of evaporation and spillage and such that occur. That is the logic behind the 2 percent allowance for gasoline.
Chairman Parks:
At this time, I do not know that there is anything further to come before the Committee. We stand adjourned [at 2:46 p.m.].
RESPECTFULLY SUBMITTED:
Mary Garcia
Committee Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: