MINUTES OF THE
SENATE Committee on Taxation
Seventy-second Session
April 22, 2003
The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 2:10 p.m., on Tuesday, April 22, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4401, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Randolph J. Townsend
Senator Ann O'Connell
Senator Sandra J. Tiffany
Senator Joseph Neal
Senator Bob Coffin
GUEST LEGISLATORS PRESENT:
Assemblyman Chad Christensen, Assembly, District No. 13
STAFF MEMBERS PRESENT:
Rick Combs, Deputy Fiscal Analyst
Mavis Scarff, Committee Manager
Gale Maynard, Committee Secretary
OTHERS PRESENT:
Harvey Whittemore, Lobbyist, Southern Wine and Spirits
Gary E. Milliken, Lobbyist, Distilled Spirits Council of the United States
Dino DiCianno, Deputy Executive Director, Department of Taxation
Alan Glover, Lobbyist, Clerk/Recorder, Carson City
Robert Spencer, Transfer Tax Auditor, Recorder, Clark County
Mary Milligan, Recorder, Lyon County
Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association
Charles Chinnock, Executive Director, Department of Taxation
Pat Coward, Lobbyist, Nevada Association of Realtors, and Nevada Land Title Association
We will open the hearing on Assembly Bill (A.B.) 437.
ASSEMBLY BILL 437: Revises definition of "supplier" for purposes of tax on and sale of liquor. (BDR 32-1161)
Harvey Whittemore, Lobbyist, Southern Wine and Spirits:
I have passed out letters of support from a number of major suppliers (Exhibit C). I would like to read some of these suppliers into the record: Ferrari‑Carano Vineyards and Winery; Allied Domecq Spirits and Wine North America; Clicquot, Incorporated, which imports and distributes Veuve Clicquot Champagne; Marnier-Lapostolle, Incorporated, which sell various premium wines and liquors; Maisons Marques & Domaines USA, Incorporated, which imports and distributes several wines; Diageo, p/c, which is the largest importer of wines and spirits such as Baileys, Captain Morgan and a number of other items; Baron Philippe de Rothschild, Incorporated, from France and Chile; the Sidney Frank Importing Company, Incorporated; Skyy Spirits; Caravelle Wine Selections; and Schieffelin & Somerset Company, which is the importer of Dom Pérignon, Moët & Chandon Champagne, the Hennessy Congnacs, Johnnie Walker Scotch Whiskies, and Tanqueray Gin.
Assembly Bill (A.B.) 437 is designed to effectuate a change to make it very clear that the policy established in the State of Nevada for over 30 years is consistently applied with respect to the regulations in the wine and spirit industry.
Chairman McGinness:
Mr. Whittemore, excuse me for the interruption, but Assemblyman Christensen is here and has a tight schedule, so if you will allow him to speak, I would appreciate it.
Assemblyman Chad Christensen, Assembly District No. 13:
I am a sponsor of this bill and I am asking for your support because it makes good sense. While I am not a user of the product, I chose to sponsor this bill because I believe in fair business practices. This bill supports those who play fair in the market and have established distribution agreements with reputable companies to distribute their products. The passage of this bill will tighten our existing law and cut down on counterfeits. I support this bill and ask for your support as well.
Senator Neal:
What is a vintner?
Mr. Whittemore:
A vintner is someone who produces wines. Again, for over 30 years the Department of Taxation has taken a very consistent view of the interrelationships between chapter 369 and chapter 597 of Nevada Revised Statutes (NRS). Apparently, some less scrupulous operators are attempting to argue there is a loophole and are attempting to take advantage of this to create the following system.
Those products, which are produced and made outside of the United States, are brought in through an importer who distributes them to a wholesaler who then distributes to a retailer. Apparently, there are those buying products on the “gray market” at the point of foreign manufacture, thereby creating their own importing company, distributing through an affiliated importing company, and depriving the original manufacturer of the right to distribute the products pursuant to the distribution agreement.
When you review the letters in (Exhibit C), Gary Milliken, working on behalf of the Distilled Spirits Council of the United States, will tell you the most important relationship people have is the ability to ensure their products are being handled appropriately, sold by reputable agencies, and in fact, the State is getting the tax dollars, which are significant with respect to these products.
For example, Dom Pérignon, which is a classic example of a great champagne, names its importer, that importer names a wholesaler, and the wholesaler sells it to a retailer. What has happened is an individual buys Dom Pérignon or alleges to have purchased it outside the normal channels of commerce. The product is brought through customs and cleared by an importer’s license from the State, although Dom Pérignon has not designated that company to be an importer or wholesaler of its product. This individual company then designates another importer in the State of Nevada. The product then makes its way into our retail establishments, either through individuals purchasing the products for use at home or for use at other establishments. The big concern people have is these products are counterfeit and there is a mechanism or an ability to pay taxes on them. We have no way of knowing unless you follow the mechanism established pursuant to chapters 597 and 369 of NRS. This is what this bill does. It does not change the law, and it is not intended to change the law. It is intended to address what people perceive was a loophole as the result of the passage of legislation in 1995. Most of this committee was involved in the brewpub legislation when we added new language regarding suppliers and a number of other things. Apparently there are those suggesting a loophole was created.
The Department of Taxation has been clear and has always taken the position these activities are illegal. This legislation is designed simply to make sure Nevada’s single source law remains in effect. Again we would ask for your support.
Senator Neal:
Definitions can affect the outcome of reading various statutes. As I am looking to understand the definition you are changing here, I have to look at what is not here. According to your definition of the bill, section 1, subsection 1, paragraph (b), line 2, the word “if,” what is the change there and how does it affect the supposition in this section? What does this mean?
Mr. Whittemore:
The language is designed to cover those circumstances that would allow individuals in Nevada who would attempt to argue the law intended, by not including the language offered in A.B. 437, to create a mechanism where a counterfeit product could be brought into the State. The bill is designed to make sure the State is making it clear it is not allowing a product to be brought in. This is what the language changes.
I think Senator Neal raises a point where the language may not be as clear. We have provided a handout to the committee (Exhibit D), which proposes some minor changes with respect to that last sentence, and it might address Senator Neal’s concerns.
Senator Neal:
My concern is, as the language is constructed in terms of this definition, what is left out enables an individual to do that. The way I understand the language, if we had Dom Pérignon and it did not fall within the first part of the definition in section 1, subsection 1, paragraphs (a) and (b), then it could be owned by a person within this State. Is this correct?
Mr. Whittemore:
No. What we are attempting to do with respect to section 1, subsection 1, paragraph (a), is to differentiate it from subsection 1, paragraph (b), and subsection 2. Subsection 1, paragraphs (a) and (b), are the only variations of the product which is brewed, fermented, distilled, or vintenered outside the United States, and in subsection 2 is for those products produced within the United States. There are only two categories; those outside the United States and those within the United States, and paragraphs (a) and (b) are the only categories dealing with activities outside the United States.
This is a very technical area and I believe we have a complete circle on covering everyone. This is why your concern is exactly that which has been expressed by 84 different lawyers suggesting that without this clarifying language there are those who could read this in a way to allow for the counterfeit or gray market products to be brought into the State.
Senator Neal:
But what about the paragraph (b) language? If we stopped it at “government” on line 2, I would understand what you are saying, but we use a supposition, “if there is no brewer.”
Mr. Whittemore:
Again, subsection 1, paragraph (b), only applies only if there is no brewer, distiller, manufacturer, producer, vintner, or bottler of the liquor. It would then go to the owner of the liquor when it is first transported into the United States, therefore, those individuals who have not designated an importer are allowed to bring in their product. This is not designed to preclude them from bringing in their product. Again, the circumstance under paragraph (b) is the owner of the liquor when it is first transported into the area under the jurisdiction of the United States government.
Senator Neal:
Let me ask you a more direct question. What liquors do not fall under these categories?
Mr. Whittemore:
There are no liquors that do not fall under this category. This language covers every circumstance and this is what it is designed to do. It would be those products which have designated suppliers, and if you have not designated a supplier, then you are the owner and you would fall under category (b), if it were made outside of the United States.
Chairman McGinness:
Is this the amendment (Exhibit D)?
Mr. Whittemore:
Yes. If you could have everyone look at this in terms of the efficacy of clearing up the concern expressed by Senator Neal, it may read easier.
Gary E. Milliken, Lobbyist, Distilled Spirits Council of the United States (DISCUS):
I am testifying in favor of A.B. 437. Counterfeiting is a problem we face in many areas. We feel this bill will put an end to it for the State of Nevada. Most of our members have signed the letters presented by Mr. Whittemore (Exhibit C).
Senator O’Connell:
Do the people you represent have a problem with the language as it is currently in the bill, or would they rather see the amended language?
Mr. Milliken:
I have not seen the amended language; I have just seen the bill.
Senator Neal:
Will this bill make it illegal or prohibit switching labels on brands?
Mr. Whittemore:
Senator Neal has identified another concern expressed on behalf of consumers in this State about illegal substitution. When someone orders a Baileys and they get a counterfeit product that is inappropriate, the Nevada Legislature acted to resolve this issue approximately 6 years ago. There is tough anti-substitution legislation in the State and I can get this information for you. One thing I would like to point out, there is not a primary enforcement agency with respect to this provision. There are some people suggesting the attorney general should have the enforcement mechanism. I would be willing to work with you on language to make it as tough as possible and use this as a vehicle, if the committee would like to do this. The consumers are entitled to get the product they paid for and it is a concern.
Dino DiCianno, Deputy Executive Director, Department of Taxation:
The department does not have a position, but with respect to the language in S.B. 437, it will address some of the issues the department has been requestedto do in the past and we felt it was improper. This will clear up the situation.
Senator Neal:
What was improper?
Mr. DiCianno:
We received correspondence from different entities pertaining to this particular type of situation which we were unable to answer, and we have remitted them to the attorney general’s office and we were informed that it was illegal.
Chairman McGinness
We will close the hearing on A.B. 437 if there is no one else to testify, and open the hearing on A.B. 531.
ASSEMBLY BILL 531: Establishes joint and several liability of responsible person and other taxpayers for payment of certain taxes, interest and applicable penalties that are owed. (BDR 32-552)
Mr. DiCianno:
I support A.B. 531 and the intent of the department is to make responsible persons liable for use taxes as well as sales taxes. When NRS 372.398 and NRS 374.403 originally went into effect in 1995, the Department of Taxation believed it covered both sales and use taxes, however, it has been determined that due to the current language, the law only applies to retailers responsible for remittance of sales tax. It is important to note chapter 372 of NRS is not only sales tax, but use tax as well. The wording in the current statute needs to be corrected to make NRS 372.398 apply to both sales and use tax. This will close a loophole and make responsible persons liable for both sales and use tax.
Senator O’Connell:
Does your department have a plan on how you are going to make the public aware of this change?
Mr. DiCianno:
We do have a vehicle by which we can provide notification, either through State tax notes or individual flyers to affected retailers and we can do this easily.
Senator O’Connell:
This is part of your plan?
Mr. DiCianno:
This is correct and, if I might add, on our Web site we can make this information available.
Senator Neal:
Is it my understanding of the bill that if a person is not notified, then that person is not liable? Is this correct?
Mr. DiCianno:
No, this is not totally correct. If the department makes a responsible party determination, we send the notification to the responsible party, and that person, in turn, can appeal the determination to either a hearing officer or the Nevada Tax Commission.
Senator Neal:
It states, “The responsible person should pay the tax upon notice from the Department that it is due.” It seems to me if I am delinquent, and I do not receive a notice, I do not have to pay.
Mr. DiCianno:
We will notify you.
Senator Tiffany:
Can you give me a couple of circumstances where this situation has happened to bring this to our attention?
Mr. DiCianno:
This is a very good question and we did do a responsible determination on a particular retailer. When we took the case forward, we lost because it does not apply to use tax the way it is currently written. This situation can arise when you have a partnership in a business and one partner decides to leave and the other party becomes responsible. If there is a liability owed, we can make a responsible determination on that individual. Also, when a business sells to the new owner, once the liability is established, it is not extinguished until it is paid or adjudicated.
Senator Tiffany:
This happened in one case?
Mr. DiCianno:
It has happened in several cases.
Senator Tiffany:
And because of these cases, you decided the law needed to be more clearly defined?
Mr. DiCianno:
This is correct.
Senator Tiffany:
How many people do you think you will have to notify of the change?
Mr. DiCianno:
Along with the notification process to all the retailers we have, we can advertise in a newspaper.
Senator Tiffany:
Are the retailers all your first targets?
Mr. DiCianno:
That is correct.
Senator Tiffany:
Will it also apply to small businesses and partnerships?
Mr. DiCianno:
That is correct. We have a database with respect to the business tax we can send to those parties also.
Senator Tiffany:
Would this have a fiscal note your department will have to absorb, such as postage?
Mr. DiCianno:
It will be minimal.
Senator Tiffany:
Therefore, it would not be a large number. How many retailers do you mail to when you do have a notice?
Mr. DiCianno:
To the best of my knowledge, if you were to include business tax accounts along with the sales and use tax accounts, we are looking at 140,000 accounts.
Senator Tiffany:
That is a lot of postage, although you said it was minimal.
Chairman McGinness:
Would some of these notifications be other notices as well and, therefore, would not be all new postage?
Mr. DiCianno:
That is correct. We can place this notification within the forms we send out routinely.
Chairman McGinness:
Could this have a positive impact on the budget?
Mr. DiCianno:
I believe it could.
Chairman McGinness:
We will close the hearing on A.B. 531 if there is no one else to testify.
Alan Glover, Lobbyist, Clerk/Recorder, Carson City:
There is a short statement I would like to make. As recorders, we do not believe it is our place to tell the committee what the tax rate should be. If you are going to increase real property tax substantially, we do need to advise you of some of the problems it will create for the county recorders.
The real property transfer tax has traditionally been a county tax, and the counties collected the tax and we audited. As the tax increased, more people tried to claim 1 of the 16 exemptions. The recorders have attempted, over the past few years, to work on a reduction and rewrites of exemptions, but we were told it might not be the best session to come in with a bill, therefore, we did not have anything drafted.
With the substantial increase in the real property transfer tax and the additional money going to the State, this tax could become a State tax administered by the counties.
I believe it was two sessions ago, the Legislature decided to pool these funds in a State account and thus, the counties lost their interest income from this money. If this committee decides to increase the tax and does not clean up the exemptions, it would be very difficult for us to administer the tax. One problem is the interpretation of the exemptions. When we are recording and have a question on an exemption, we go to our district attorney for advice. Because there are 17 recorders and 17 district attorneys, we have the possibility of getting 17 different opinions. Therefore, there is potential for a tax not administered fairly and equally throughout the State, which could trigger a court challenge.
Another problem is in NRS 375, where there is a mechanism to appeal the tax and the decision of the county recorder. We could have thousands of appeals generated each day if the law is not clear. I believe Mr. Spencer spoke about this last time where there are 2000 to 4000 recordings per day in Clark County and, in theory, every one of them could claim an exemption and appeal it and truly bog down the system administratively. We do not get these problems presently because the tax is relatively low.
A third problem is only Clark and Washoe Counties have tax auditors, the rest of us audit at the counter. We review if the tax is high and the exemptions are not there; this could slow down the recording process and not allow people to get their recordings on in a timely manner. We are not in a position to tell you that by eliminating some of the exemptions, this would generate more revenue. We can tell you that without a cleanup of the exemptions, it will be very difficult to collect this tax fairly. What we are recommending is you reduce the number of exemptions and rewrite others so that you give us the authority, statutorily, to go to the attorney general’s office for opinions regarding the transfer tax. Presently, we have to go through our district attorney, who then goes to the attorney general. A response can take weeks and sometimes never comes. By doing this, you would have an opinion that applied Statewide.
Finally, you allow for an increase in the tax to compensate the counties for the loss of the interest income and for collecting the tax.
Senator Townsend:
The exemption problem appears to be one of definitions. If you were to say that the tax applies at the recording, which has nothing to do with the real transfer property tax, then you do not have an exemption problem because nothing is exempt. The tax is applied whenever something is recorded. This would be a recording tax, not a transfer tax.
Mr. Glover:
I think under common law and statute, you and I could do a deed right now and you would have the property. It is just until it is recorded; the rest of the world does not know this.
Senator Townsend:
I am not asking for an editorial. But before you get to the point of what deductions are correct or not correct, if you tax at the point of recording, you eliminate every exemption. If you just deal with the issue of transfer, then you have to deal with the exemptions. I think your point is an important one and that is the consistency of opinion, and I think the attorney general can provide for all 17 counties. Therefore, one person’s exemption will not be another person’s non-exemption. Do you see the point and the difference I am trying to make between the recordings versus the transaction? The moment it is recorded, it is taxed.
Robert Spencer, Transfer Tax Auditor, Recorder, Clark County:
Some exemptions, if you tax at recording, do not exist for federal agencies or the federal government, and those things, by constitutional authority and by federal law, we cannot tax. You cannot tax everything, because you automatically get into the field of exemptions.
Senator Townsend:
I agree with you. Obviously, the supremacy clause of the United States Constitution already deals with that issue and you do not have to put that into law. When someone comes forward and there is a government transfer, you cannot tax it anyway and this is an automatic exemption we do not need to put in. I am offering this for purposes of the committee’s debate. You have made a good effort to come up with alternatives to the current exemption issue. I spoke to some people about definitions making them recordings and not transactions.
Mr. Spencer:
There are states that do approach it that way and I believe Pennsylvania is one of them.
Senator Tiffany:
Are there not recording fees already?
Mr. Glover:
Yes, there are. There is a recoding fee of $14 for the first page and a $1 for each additional page and this is Statewide.
Senator Tiffany:
How much goes to the State versus the county?
Mr. Glover:
We collect $1 and it goes to county foster care.
Senator Tiffany:
So right now, it all goes to the county?
Mr. Glover:
Yes.
Senator Tiffany:
Is your department funded by some fee-based activity such as this?
Mr. Glover:
That is a real debate, now that we are going through our budget processes. We do generate a lot more money than it costs to run our offices. I am not sure if this is true in Clark County, but I know for the rest of us it is true. We are one of the major funding sources for county government.
Mr. Spencer:
Clark County is a surplus-producing department just on recording fees.
Senator Tiffany:
If you have $14 for the recording fee, this funds your general fund plus your department. If we did a “tax” on recording, how would that be different than a fee?
Mr. Glover:
You can decide to add a per-page fee. This certainly could be done and the recording fee can go to $100 a page. The county receives $14 of it and the State gets the rest of the money. This is a possibility.
Senator Tiffany:
We have not figured out how much revenue that would produce?
Chairman McGinness:
In one of the committee meetings, someone mentioned when the transaction was made and the Hilton Hotel in Reno bought out Bally’s, there were no taxes paid and it was a stock transaction. If it were different, would there have been a tax on this transaction?
Mr. Glover:
The answer is no. When there is a stock transfer, there is no deed recorded. Many states tax those transfers under this type of law, under transfer tax and I do not know the percentage. It is like gaming; if 5 percent of the stock of a corporation changes, it triggers the State Gaming Control Board to do certain things. If 25 percent of the stock of a company changes, then it would trigger some sort of a tax. My personal opinion is if you wanted to generate money, this is how you would do it. Now, would the Nevada Resort Association like this? No, they would not. Take the sale of a hotel through a stock transaction, you are talking $1 billion. Taxation is avoided when the control of property changes hands using this vehicle. But if you sell your house to another party, this is taxable; therefore, the tax falls upon single-family dwelling types more than it does large corporations.
Senator Townsend:
Under a recording fee or tax, are these recorded as having changed hands?
Mr. Glover:
No, they are not. There is no deed changing hands, therefore, we never see them.
Senator Townsend:
This is also the same with most of the assets in those exchanges. Every person who is taxed, including the sale of a car to another party or a small business that is not a corporate transfer of stock, everyone we tax is not taxed in the exchange of shares of stock.
Mr. Glover:
This is correct.
Mr. Spencer:
There are deeds recorded to change the names once ownership has changed hands. The names on titles are changed, but they are not taxed under the current statute. It is another exemption.
Chairman McGinness:
Is there something the Legislature can do in instances such as this and ask a mandate be filed along with the deed, or with trust documents or certificates in order to make your job easier?
Mr. Glover:
I believe in the list of exemptions we have suggested to be eliminated such as exemption 1, which is a change in name, if this exemption were eliminated, it might. Maybe Mr. Spencer knows better, would this trigger a tax? I do not know; it might.
Senator Townsend:
With regard to your issue, I am talking about if you redefine this. The minute you walk into the door to change or record anything, there should be a value associated with it. This value would trigger whatever the percentage on that transaction would be. Right now, a huge amount of property is escaping taxation because it is done as a stock issue. This is a policy that has been established. We need to remember, it is a policy and may not occur in Carson City, Reno, or rural areas and it is an issue. If an individual had a large piece of property to be sold in this State, and I were his or her attorney, I would make it a stock issue and avoid the tax. I do not think this is right. Everyone needs to be on the same playing field.
Senator Tiffany:
I have an E-mail from a Washoe County recorder, Kathryn Burke, informing us that if there are any questions, she would be happy to answer via this venue.
Chairman McGinness:
Obviously, Mr. Glover, each one of these exemptions was put in for a reason and Mr. Spencer went through this and eliminated many of them (Exhibit E). Is this a consensus document?
Mr. Glover:
The president of our association is here and we are trying to keep all of the recorders informed on what is going on and the basic philosophy, whatever exemptions you can eliminate, would make their life easier. This is what they want. We are presenting them to you and if you get rid of any of them, it would help us out.
It is very obvious the two largest counties have the most money and you should listen to the recorders in those counties, because they audit and have more complicated problems than recorders in smaller areas. The sale of property in Clark County, including the railroads, involves multi-million dollar figures that smaller communities would never see. The biggest thing to happen to us was the Ormsby House, but the owner decided to keep it.
Chairman McGinness:
If we were going to make your life easier, we would take all of them out, but each one had a policy decision and we need to look at them. Your recorders did bring up some very interesting issues.
Mr. Glover:
Even if this committee decides not to pursue this, I really think it is worth studying over the next couple of years. There are serious policy decisions to be made here. You have to be careful not to tax single-family dwellings and first‑time home buyers out of the market or put a damper on new construction in this State. These are the things fueling our economy in many of the counties. We do not want to put this into a tailspin because they are important to us. Even if something is done this session, it would pay to have a committee monitor this over the next couple of years to see how it is working and what is happening. It is a big item.
Mary Milligan, Recorder, Lyon County:
I would just like to reiterate what Mr. Glover has said. We could reduce the exemption list to five with which we can live. It just would make our lives easier. If you eliminate some of the exemptions, as Senator Townsend said, your property transfer tax would increase and so would the State’s portion. Therefore, it would not jeopardize the first-time home buyers.
Chairman McGinness:
Mr. Spencer has supplied us with a list of the 16 exemptions, you said you reduced your list to 5. Can you go through your list and indicate which ones you would like to remain?
Mr. Glover:
The exemptions remaining would be 2, a transfer of title to the United States; 3, a transfer of title recognizing the true status of ownership of the real property; 5, a transfer of title between spouses and former spouses with decree of divorce; 9, transfers, assignments of conveyances of unpatented mines or mining claims; 11, a transfer, assignment, or other conveyance of real property to a relative of the person or his or her spouse. We have added for the spouse, because now they record two deeds. They transfer title from mother and father to daughter, and then add the son-in-law later, because if they try in the initial transaction, they have to pay the whole amount. So, they transfer to the daughter and later she transfers the title to herself and her spouse. Why play this game; let them have the exemption included.
Chairman McGinness:
Let us look at exemption 8, where it states: A transfer of title to or from a trust. A lot of people use trusts in estate planning. Would it be okay to leave this exemption in, or would this be a problem?
Mr. Glover:
I think it might be a problem. I had a conversation with the land title association, Mr. Sande, and the Realtors, and I think it could upset how people hold property and transfer property to their heirs. One of the problems is, do we really know if it is a trust or not? You transfer title to the Alan Glover Pension Fund, is this a trust or not? Mr. Sande suggested maybe we should require the trust certificate the banks use and record this along with the deed. This would solve a huge problem there, even if you did not do anything else. Trusts are important and the more I think about it, the less I like deleting the trust exemption, but there could be information from other people on this topic. They are also misused.
Chairman McGinness:
Mr. Combs, I believe you had a legal opinion that we had to leave bankruptcy in these exemptions?
Rick Combs, Deputy
Fiscal Analyst:
I had asked legal counsel to look at the current exemptions and do a review to see if any of them would cause a problem with federal law. There was an indication the only one that could not be eliminated was the exemption for bankruptcy in subsection 12. Federal law indicates the making or delivery of an instrument of transfer under a confirmed plan of the bankruptcy laws may not be taxed under any law imposing a stamped tax or similar tax. A stamp tax was the federal predecessor to the real estate transfer tax we impose in this State.
Mr. Glover:
We have no problem with this and I do not believe I have ever recorded one of those. If it is required, then there will be no problem in leaving it in.
Mr. Combs:
Legal counsel is still looking into exemption 13, dealing with the Securities and Exchange Commission. I think the date of the statute for this federal law was 1937, and I feel it is an item that could be eliminated.
Chairman McGinness:
Is there anyone else to testify about the real estate transfer tax exemptions?
Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association:
We have had a lot of our members very concerned, based on phone calls and conversations, about the reduction of the exemptions list. Also, in reference to exemption 8, if there is a document filed with the bank for a certificate of title, to use this as a qualifier would be acceptable to us. In fact, it seems to make more sense than the way current law is written.
There were other comments raised and I assume this hearing was only for the exemptions. If we get into changes of distribution and increasing rates, and if there will be another hearing or a bill, at that point, I will have input from our board.
Charles Chinnock, Executive Director, Department of Taxation:
We will help in any way with the real property transfer tax. I will advise that we are responsible for regulations and we did go through a process in 2002. By working closely with title companies and the recorders, we do have a current set of regulations that cover existing statute; we will continue to do this for any laws that were passed.
Senator Neal:
Do you have any suggestions on any laws, regulations, or statutes we can eliminate?
Mr. Chinnock:
No, I do not.
Senator Townsend:
There seems to be a great deal of misunderstanding about your information technology needs. Can you lay this out for us and do it in the context of what we are discussing?
Mr. Chinnock:
Our current technology exists in two forms. One, we have Automated Collection Enforcement System (ACES), which only deals with sales, use, and business taxes. The only other type of current information technology we have is on a desktop, either through Excel or Access type of software.
Senator Townsend:
In the real world, if this committee were to process something that might include revenues from the real property transfer tax or any of the other provisions, and in order to help the public get the revenue they need, you would need a more sophisticated system, would you not?
Mr. Chinnock:
We have two goals with our information technology. One would be to continue the operations of the existing taxes and the other is to satisfy the needs of the Legislature. I guess there is a third need, and this is to end up with an integrated tax system which does the billing, collection, and distribution of all the taxes and will still provide flexibility for the future.
Senator Townsend:
If the Legislature chose only to adjust or change the current taxes we have now and not implement any new taxes or changes, what would be the financial cost for upgrading to your third need of an integrated tax system?
Mr. Chinnock:
We will need a system like this; but in terms of cost, I gave a cost range of somewhere between $18 million and $28 million.
Senator Townsend:
Okay, less than $30 million could give you an integrated system that would be a good system, taking into account the changing nature of technology. Is this a fair assessment?
Mr. Chinnock:
As I have stated in earlier testimony, we did work with a planning staff as to what the best approach would be and we did put out requests for information. We received responses from 16 companies that came in a week ago and we are putting this information together to do an evaluation, so we can have a time line and more of a handle on what the costs would be. Additionally, there were indications from different committees to look at some creative ways to approach this, from benefits funding to outsourcing and other issues. These things are being considered, so we can get back to the committee with our results.
Senator Townsend:
If we did nothing new with our current tax structure, how many people would you need for this integrated tax system? I am assuming the $30 million is only for hardware and software, but does not include personnel. Is this correct?
Mr. Chinnock:
No. It does not include people and I do not have the numbers, but there would be a small addition to staff. I think we provided six additional staff members to our integrated technology and then provided some outsourcing for consultants to do project management and the like.
Pat Coward, Lobbyist, Nevada Association Of Realtors, and Nevada Land Title Association:
We support your efforts in looking at the exemptions, and we worked with the recorders for a long time and believe this is long overdue. If there is anything we can contribute, we are more than willing to do so.
Chairman McGinness:
Ms. Vilardo, given the time we have left for session, if you want to put your remarks on the record as far as the raising of the transfer tax and the distribution, you should do it now.
Ms. Vilardo:
I would like to say I did poll the board on this, generically, because there were no specific details and we could not get a consensus of opinions. There were a number of items that came back. One of the issues I raised was how the board would feel if there would be a percentage increase levy of 0.25 percent or 0.50 percent on the existing real property transfer tax, on the basis there would be a collection mechanism in place.
Some of the comments that came back need to be addressed if, in fact, you are increasing the tax. If you do it under the existing framework in statute, the revenue you would collect, although it might have had increases of 7.7 percent on average over the last 10 years and only 1 year in the negative, Statewide, the problem is you have no cash flow. If you look at our tax collection mechanisms, they are full mechanisms for the collection of tax. You have a time certain for remission; you have penalties if it is not done. Under the existing law, you do not have a definition for why the tax is being imposed, or a recording of a deed, and then there is 30 days to remit the tax. There are instances on some of the transactions for real estate that are private transactions and can be very large, in the millions of dollars, or it could take a year or two before there is an actual recording of the title. I went through NRS 375 and I did not see anything saying you must record a title. I could decide to put something in a will and do a quitclaim deed with my sister; why should I record anything. There is no requirement for me to do this. It is not the way you structure a tax from which you want to have revenue.
In view of the discussions that just took place, I believe you could restructure this. Senator Townsend said it; you have no definition as to why the tax is being collected. It could be just a fee because I walked into the recorder’s office.
There are some federal codes one of our members had provided to me and might give some details. I gave them to Mr. Glover because he and the recorders work with this every day. It may provide some definitional clarity or may provide the necessary documentation. There is a federal code giving you 30 days to file paperwork on the sale of property. We are not looking at creating a State level of collection, or a bifurcated system where the local government is doing one thing and the State is doing something else. If you are going to continue with the local governments collecting the tax, you do not want to put increased burden on them or an unfunded mandate. If you picked up some of the filings that have to be done with the federal government and can use them in conjunction with ours, you would save a percentage of audits that might otherwise have to be done. In other words, the way we have done the estate tax where it has been a filing of the federal document would maximize the efficiency of the collection.
Another issue raised on this with concern is what do we do with affordable housing? If you go too high on the transfer tax, how much of an impact does it have? Also, there is a pyramid impact to this. You can have real estate developers paying the tax because they sell to builders and then the builder sells the home and this tax has been doubly applied. I would like to see if there is a way to avoid or identify it. If we increase the rate substantially, it could have an impact on affordable housing.
I wonder if the percentages could be tiered? Maybe up to the $500,000 level. This may be complicated, but there has to be an acknowledgement that we want to protect affordable housing.
Senator Townsend:
I think your point is well taken. When I first looked at this, we are not talking about the tax already applied, we are talking about an additional piece that would exempt properties under $150,000 to $200,000. The average home in the State is estimated to be valued at $141,500. If you were to pick Washoe County and Clark County, the value is about $189,500. So if you chose $200,000 to exempt from the new tax, this is also another way to keep it affordable and to protect the average home owner. Your way could very much be the same, because you are talking about tiering. If you would consider this exemption during the debate, I would appreciate it. I do not know which is harder for the department to deal with, either a tiered system or an exemption to the $200,000.
Senator Neal:
What, in your judgment, would be too high a transfer tax?
Ms. Vilardo:
Senator Neal, I do not know what is too high, but when we get out of session and you have done something and the recorders or I start calculating it, and we start looking at 200 to 300 percent increases, this is “sticker shock.” I will make the same comment with this tax I have made with the others, because of the current economy and because construction and the sale of homes are important. It is important, not only for revenue, but because it is the great American dream. I would go as low as you possibly could even if you had to raise it later.
There was a point raised by Mr. Glover and it is in the task force bill and it has not been heard on the Assembly side. It is an oversight committee to make sure what we thought was being done is actually getting done and to pinpoint quickly any changes that would come in.
Let me raise another issue. You usually want to have a tax that is relatively simple to administer regardless of who is doing the administering. Right now what is happening, at least from the discussions I have heard, is about a percentage increase on the value. The current tax is a flat measure on value, so how much the tax will be calculated depends on which county you are in. This creates a more complicated system. In the Assembly, they have already done some work whereby they took the amount that is generated in each county from the local governments and determined what percentage could be added.
Obviously, if you were to change that flat base to a percentage and have it go back to the local government and have, let us say, the percentage mechanism to be used for the State, one of the things you would have to do is to make sure the bonding counsel was contacted. Now that the real property transfer tax at a local level is one of the six revenue sources for the local government revenue pool, we have a number of counties that have up to 15 percent of the pooled money bonded. With any change you make, we have to be sure that the revenue holds the bonding covenants harmless.
I would hope the Department of Taxation would be an overseer, but you would not bifurcate the collection system with a remission system. The State Department of Taxation takes 0.75 percent because they collect the sales tax and distribute it to the local governments. If this comes to pass and if the recorders get this collection mechanism, I think, at a minimum, you should look at the reverse being done for them to be paid for the collection they are doing for the State. They would be saving the State a certain number of employees.
These are some of the points I would like to make and it would be much easier if you created this and did a rate, whether it is flat or a percentage, and there be consistency between the existing and the new. I have other suggestions, and if we see a bill, I would put it out to some of my members. It is late in the session and it would be strange not to have something that would not require amendments to it, especially technical ones.
Senator Tiffany:
You said you did not want the system bifurcated and there were a couple of different points for efficiency, one federal and one county. Did I misunderstand?
Ms. Vilardo:
I may not have spoken clearly. When I referenced the federal government, it was the efficiency of audits, which you have. You have to have audits in a tax system.
Senator Tiffany:
So, this has nothing to do with the collections? It just has to do with audits?
Ms. Vilardo:
Having to do with collections, no. There are some documents required by federal code to be sent to the federal government. Those documents that are filed having to do with the sale of property and having those document remitted to the recorders would, in effect, solve one of the audit problems. It would become a desk audit and very much like we handle the estate tax currently.
Senator Tiffany:
You mentioned it is fair to pay the county if we did this extra collection. If they have to do the collection as well as some of these audits, is the 0.75 percent or 1 percent adequate?
Ms. Vilardo:
I personally do not think so, but they would be better at addressing this question.
Senator Tiffany:
A comment was made with reference to the application. What I was hearing is the Nevada plan for the distributive school account is based on wealth. In other words, we basically index it. Is this what you are saying?
Ms. Vilardo:
It is not what I want to do, it is a question of the way the existing law is now. The existing law states that 55 cents is collected in all counties that is remitted to that county and 10 cents is added on top of that which is remitted to the State for the low-income housing trust fund. In Clark County, they go an additional 60 cents for distribution to the school district for building facilities, which was done during the 1999 Legislative Session. I know for sure the district has bonded against that amount of money, because I sit on debt management. We have had that come through and my other concern is to make sure that what we do “holds harmless.”
Senator Tiffany:
That was my next question as to how many ways this real estate transfer fee is already encumbered. I know we are looking at a bill for Senator Rhoads on the real estate transfer fee that could be enacted by rural counties for weed abatement. Do you know how many ways it is encumbered?
Ms. Vilardo:
No. Just the three ways I have told you about. This adds a new element and is a concern. I am glad the committee has had some of the requests for real property transfer tax and you have eliminated them. This is a problem you get into when you want to use the taxes when you have multiple governments vying for the same revenue source and it becomes competition with each government looking at it as its source. Eventually, we get to the point of diminishing returns. It may take 10 or 20 years, but it has been proven time and again when you have this type of competition.
Senator Tiffany:
The real estate transfer fee from the Clark County School District, is that not up in 3 years?
Ms. Vilardo:
No. The real property transfer tax is one of the provisions that was done for the additional financing; you had the roll-over provision in the same bill and it finishes in 2008, but this particular portion is of concern to me because we wanted it set for 20 years or a certain time. The real property transfer tax is allowed to be levied for the school district, item for item. There is no end date on it, so this becomes problematic.
Senator Tiffany:
It is encumbered for 20 years with the bond? I thought we only gave them 10 years?
Ms. Vilardo:
No. You gave 10 years for the roll-over section of the bill until 2008. But the real property transfer tax was contained in that bill also. The five-eighths of a cent on the room tax that went to the fair and recreation board and the convention center in Clark County, was redirected from the convention authority to the Clark County School District and this was also done with no end date or any point where it would come back to the convention authority.
Senator Tiffany:
But that 10-year bond,was it not bonded from that revenue stream?
Ms. Vilardo:
No. The 10 years on that was only a roll-over portion that dealt with using that part of the existing property tax bond-debt rate, as it freed up to roll it over into new bonds.
Chairman McGinness:
If there is no one else to testify on the real estate tax exemptions, we will close the hearing on this. If the committee would return to A.B. 531, the bill brought forward by the Department of Taxation, there was a technical change with no opposition.
SENATOR RHOADS MOVED TO DO PASS A.B. 531.
SENATOR TOWNSEND SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
*****
Chairman McGinness:
The meeting is adjourned at 3:37 p.m.
RESPECTFULLY SUBMITTED:
Gale Maynard,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: