MINUTES OF THE ASSEMBLY COMMITTEE ON TAXATION Sixty-eighth Session May 11, 1995 The Committee on Taxation was called to order at 1:15 p.m., on Thursday, May 11, 1995, Chairman Stroth presiding in Room 332 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. Bob Price, Chairman Ms. Jeannine Stroth, Chairman Mr. Pete Ernaut, Vice Chairman Mr. Michael A. (Mike) Schneider, Vice Chairman Mrs. Maureen E. Brower Mrs. Joan A. Lambert Mr. Mark Manendo Mr. John W. Marvel Mr. P.M. Roy Neighbors Mr. Brian Sandoval Mr. Larry L. Spitler COMMITTEE MEMBERS ABSENT/EXCUSED: Mr. Morse Arberry, Jr. GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Mr. Ted Zuend, Deputy Fiscal Analyst OTHERS PRESENT: Ms. Janice Wright, Exec, Deputy Director, Dept. Of Taxation Mr. John Haycock, Haycock Distributing Company Ms. Carole Vilardo, Nevada Taxpayers Association Mr. Peter Krueger, Nevada Petroleum Marketers Association Mr. John Cooper, Allied Petroleum and Washoe Keystone Fuels Chairman Stroth called the meeting to order and asked the secretary to call the roll. There being a quorum present, Chairman Stroth opened the hearing on S.B. 272 and asked anyone wanting to testify to please begin. SENATE BILL NO. 272: Establishes fees for issuance and renewal of certificate of compliance to suppliers of liquor located outside of this state. Testifying first on this measure was Ms. Janice Wright, Deputy Executive Director Department of Taxation. She explained this bill was requested by the Department of Taxation and deals primarily with out-of-state liquor suppliers. She read her testimony into the record, included herein as Exhibit C, and volunteered to answer any questions from the committee. Mr. Marvel asked why the Department of Taxation is asking for a fee much lower than the other states mentioned by Ms. Wright and was advised they are asking only for the actual costs involved. She added Nevada has about 600 out-of-state liquor suppliers which will generate about $15,000 by charging the requested $25.00. That revenue will not go to the Department but will go into the General Fund. Mr. Marvel pursued his line of questioning by pointing out the Department will have a certain cost associated with administering this collection and was advised by Ms. Wright, that cost is currently built into the budget. Ms. Brower asked for clarification on why we charge our instate suppliers $500.00 but charge the out- of- state suppliers $25.00? Ms. Wright explained there is currently no charge to out-of-state suppliers. Ms. Brower continued her questioning with asking, if a Nevada supplier goes to California what they are charged? Ms. Wright responded California charges $50.00 for the initial application and $50.00 for the annual renewal. Ms. Brower then asked, if we are not making money on this, what is the benefit to charging them $25.00 for certification? She was advised by Ms. Wright the benefit would be to the Nevada taxpayers. Currently we are asking Nevada taxpayers to generate revenue going into the general fund to pay the cost of the service provided to out- of- state businesses. They are now being certified free. There were no further questions or testimony therefore the hearing was closed. A MOTION WAS INTRODUCED BY MR. MARVEL TO RECOMMEND `DO PASS' ON S.B. 272. SECONDED BY MR. ERNAUT. Prior to the vote, Mr. Spitler stated he supports this bill but feels the fee charged should be more than the proposed $25.00. He added it seems a little unwise to have this function performed without some added benefit to the state. Perhaps we should consider making the fee reciprocal with whatever the adjoining state is. It could be based on a reciprocal schedule in order to be fair to both businesses. For example, if Nevada's suppliers are distributing to California it should be based on California's fee, or to Arizona it should be based on their fee. Both Mr. Manendo and Mr. Neighbors concurred with the comments made by Mr. Spitler with Mr. Neighbors expanding those comments to include the suggestion we attempt to make this revenue neutral. Prior to the vote being taken, Mr. Ernaut introduced a motion for an amendment. MR. ERNAUT MOVED TO AMEND THE MOTION TO PROVIDE THE FEE SHALL BE $50.00 RATHER THAN $25.00. MOTION SECONDED BY MR. MARVEL. Prior to the vote being taken, Mrs. Lambert stated she agrees it would be an excellent idea but she suggested finding another fee the Department collects from in-state business or government entity and lower that conversely. She pointed out last session we increased the collection fee for sales tax for local government by a significant amount of money. She has been trying to find a way to make this pay enough to take that down but, as far as she can recall, that is around a million and a half or two million dollars and she doubts that is doable. She feels certain there must be a small fee somewhere that can help Nevada businesses or residents by offsetting what the out-of-state people are paying. She stated we should continue to look for avenues where we can do our Nevada businesses or residents some good. Mr. Ernaut agreed with Mrs. Lambert but does not see, in this particular bill, how her suggestions would work. He feels what Mrs. Lambert is proposing could be a concerted effort and he volunteered to assist her in finding a fee. He added lowering the fee commensurately defeats the purpose of this bill which is to cover the costs of administrating it. Increasing the cost from $25.00 to $50.00 was to make it commensurate with the neighboring states. He pledged his cooperation to Mrs. Lambert in finding a comparable fee but does not feel it can be in this proposed legislation. There being no further comment, a vote was taken on the amendment with the vote being unanimously to adopt. THE VOTE ON MR. MARVEL'S MOTION ON THE BILL TO AMEND AND DO PASS WAS TAKEN WITH THE VOTE BEING UNANIMOUS. Chairman Stroth requested Mr. Manendo handle this bill, as amended on the Assembly floor. Distributed as part of the record was Exhibit D, the bill explanation prepared by Mr. Ted Zuend. Chairman Stroth announced the next bill on the agenda today is SJR 14 which is sponsored by Senator James. She has been advised the Senator is unable to appear at this time and explained we would hold off until he can be available. Under the agenda item, "Matters continued from previous meeting" the committee moved into work session with the following bills being considered: ASSEMBLY BILL NO. 415: Revises provisions relating to imposition and collection of tax on special fuel. A proposed amendment to A.B. 415, with regard to the imposition and collection of special fuel tax, has been distributed. This committee had previously asked the parties involved with this measure to come up with an amendment (Exhibit E) and Chairman Stroth pointed out they have complied with our request. There is one area, however, where they appear to have not reached a compromise. Ms. Stroth suggested we begin with testimony from the involved parties in order to understand the conflicts and amendments. Speaking first was Ms. Carole Vilardo, representing the Nevada Taxpayer's Association. Ms. Vilardo stated she would begin with a little background on this and then get into the specifics of the changes. A.B. 415 came out of an interim committee to study highway funding and within the overall scheme of trying to generate more revenue for the highway fund, in a passive manner, there was the question of evasion particularly on diesel fuels. We are all aware this has been a major problem especially on a federal level and in fact, is identified federally with a $2-billion problem. A.B. 415 is the result of a recommendation made before the interim committee on highway funding to change the point of collection of taxes in an attempt to eliminate the evasion factor on diesel fuel. In discussions with a number of groups involved, it was determined there was some language in the proposed bill that was not properly reflective of what we were trying to do. The amendments before the committee today attempt to clean up those problems. There has been a group since the 1989 session, an ad hoc group, that has met and proposed nine recommendations and these amendments are part of that proposal. That group was made up of the Nevada Taxpayers' Association, the Petroleum Oil Marketers, the Nevada Motor Transport Association, California AAA, A.G.C. Nevada, A.G.C. Las Vegas Chapter, NACO and the League of Cities. They found themselves in 1989 recognizing that there has been as big a problem with funding our highway infra-structure as there has been at the local level and yet we kept opposing one another on various elements. The one commonality they all had was we all agreed there was a need for revenue but no agreement on the way to get there. Acknowledging the need for revenue, they agreed to start meeting informally to see what recommendations they could submit to the legislature with a cohesive recommendation and not be arguing these points in front of committee. They have continued to meet and this is one of the recommendations the complete group made that the interim committee accepted. Some of the bills have already been through Transportation Committee and this committee may have another bill coming. That is the background of the bill. The Nevada Taxpayers' Association supports this bill conceptually but with the amendments to be addressed by Mr. Krueger with the changes they determined were needed. Speaking next was Mr. Peter Krueger, representing the Nevada Petroleum Marketers Association, who reiterated, as Ms. Villardo said, they have been meeting on this concept and have not always agreed 100% on the vehicle to arrive at the correct point. He added the reason they started after 1989 and 1991 was due to the large increases in gasoline and diesel taxes that occurred during those sessions. There is no room, in their estimation, in the marketplace to go forward with increased fuel taxes. The corollary that was correctly pointed out is there is a tremendous need in the state of Nevada for more funding for highways. It has been pointed out there is as much as a $10-billion shortfall over a ten year period. In the state of Nevada, all our highway construction is financed out of motor fuel and special fuel taxes; we do not use General Fund money as many states do. As a result of the number of bills, in particular A.B. 415 that came before them, there was a sense by some members of the coalition that by moving the collection point to "the rack", that is the supplier and major oil company level, the threat or actual occurence of evasion would be reduced. Some individuals in the business have speculated that number could be as high as $8 to 12-million. Their group does not subscribe to number and the Department of Motor Vehicles agrees as well the number is somewhat less than that. This bill, in their estimation, will not eliminate the problem of evasion and the only way to get a handle on evasion is to put up ports- of- entry which this state has chosen not to do. Submitted today is a bill that has been heard by this committee and is now under consideration with the amendments entitled, "Second Draft" in an effort by the parties to clean up the bill. He pointed out there was one issue that Mr. John Sande, representing the Western Petroleum Marketers Association, cannot agree on and that is the section that has to do with the collection allowance. He wanted to explain this as it is crucial and he has some members who feel very strongly about the issue of moving the collection point. He proceeded through the amendment calling special attention to Section 25 dealing with the collection allowance. There has been in the statutes since 1953 a provision that 2% of the fees collected is deducted by the fuel dealer and that money is retained for collecting the tax. That is how the statute currently reads. The major oil companies have proposed, initially, that they should be granted that 2%; the position of his group is against it. Once we move collection of the fees up to the "rack", the major oil companies will in fact collect it. They are held harmless, by the language of this bill, in the sense that if one of his members fails to pay them what is due in taxes, they have two choices. Number one, they can deduct that amount before they pay the Department of Taxation so they are not out any money, and #2 the Department of Taxation, by this bill, is going to be responsible for going after the wholesalers to collect the uncollected tax. His group's position is, the major oil companies have no risk involved whatsoever yet his members are the ones who are extending credit to the very smallest commercial customers and where the risk really exists. His members will be out of business if they miss a tax payment because they won't be supplied fuel and there is nowhere they can go to get fuel because of contractual arrangements. Their feeling is, it makes no sense to extend to the major suppliers, the 2% collection allowance as they have no risk, as this bill has been written. That continues to be a major source of disagreement between his association and the major oil companies. He asked the committee members if they have any questions on the second draft. There being none, he pointed out there was one other amendment with some language he wanted to clarify relating to reporting on the diesel fuel as far as his members are concerned filling out a form as to who their customer actually is. This, he explained allows the Department of Motor Vehicles to do a better job at tracking the fuel. In response to a question by Chairman Stroth, he stated he was referring to Section 9 where it specifies the place to where the special fuel would be transported. He added his association, since the outset, has opposed moving the collection point. Their feeling is the diesel fuel should be collected at the wholesale level and not the retail level nor the rack. They vehemently disagree on the 2% and they do not feel this bill will do what the proponents think it will. Ms. Vilardo interjected something she felt needed to be brought before the Committee. She explained the group she has been working with has agreed there are some elements within the way we collect fuel taxes that needed to be corrected. Nobody knows the amount of evasion other than, nationally, it has been identified as a very large amount. When they started looking at this it was generally assumed they would get, maybe, $3-million dollars each year on evasion, maybe $2.5-million. Montana has been doing this for a year and actually picked up $12-million in evasion revenue. The one way to stop this in Nevada is to move all collections back to the refinery level but would wind up with the same situation as mail order sales. You would have so many multiple tax rates that those people would be responsible for, and the other way would be to have ports of entry. Ports- of- entry was looked at but found not being efficient, using the Oregon experience. A companion bill to this was considered, whereby once we could get collection points for both gas and diesel at the same point, it was the hope they would be able to move them into one agency on the basis that we could also streamline the costs of administration. Generally speaking, the group supported the concept of this bill, that is, trying to passively get revenue which is out there. Speaking next was Mr. John Haycock, President of Haycock Distributing Company, stating he was not a paid lobbyist but explained his company was in the business of marketing commercial petroleum products throughout southern Nevada. He estimated his company distributes as much diesel fuel to commercial consumers as anyone in the state and in that capacity they have a very high level of interest in this bill. They have been collecting diesel fuel taxes as an agent for the state for over thirty years. To be clear, their concern with this bill is much less the actual change in collection point than it is the portion of A.B. 415 which infringes upon their 2% collection fee. They see this as an attempt to give a portion of their compensation to major producers with no corresponding decrease in administrative costs or, more importantly, financial liability. He is surprised at those who would support an effort to take fair compensation away from them for themselves. He added it is the nature of the motor fuel marketing business to be extremely capital intensive that is, it is very common to extend $10,000 credit to sell or transport a load of product to realize a 2% margin, or about $160 profit. Of course, the risk associated with extending this kind of credit is tremendous. And although they recognize this as being a necessary part of their business, they also know that in the event ABC Trucking Company files bankruptcy leaving them with an uncollectible receivable, the state does not consider the portion of that receivable which represents excise tax to be uncollectible. Rather, they look to Haycock Distributing Company to remit the tax regardless. Despite the wording in the current law, his industry accepts the 2% collection fee, not so much as a payment for administrative effort as it is an offset for the financial risk 100% of which they assume and will continue to assume regardless of the collection point. He stated it is interesting to note the producers are very willing to take part or all of their 2% compensation but will not step to the plate to assume any financial risk. To put these numbers in a form that the committee can appreciate, their company will do close to $50-million in revenue this year. Their budget for bad debt is one-half of one percent, or $250-thousand dollars. Of that amount at least 75% would be associated with taxable diesel fuel. That dollar amounts represents about 150-thousand gallons of taxable diesel fuel for which they will not get paid. That 150-thousand gallon amount at $.27 per gallon means that about $30- thousand of their loss the state will collect without the blink of an eye. The major distributors, also, will not lose a dime but Haycock Distributing Company will be that much less viable because they are the ones footing the bill. The state will not participate with consumers whose taxes are uncollectible nor will major suppliers. In fact, the bill specifically provides that major suppliers can deduct an uncollectible tax. Their only compensation for the amounts which they absorb in uncollectible state taxes is the 2% fee, in their case, about $1300 per month which the state allows them as their collection agent. They certainly are not going to hand that fee, or any part of it, over to the major oil companies when they have no intention of participating in the financial liability. They have been in lengthy discussions with their major suppliers, Seven Products Company, and have suggested several options which they are very willing to support. He asked if he could share some of these with the members. He wanted to assure the members he did not have the authority to speak for Chevron. Their first option would be to kill the bill. They realize the intent is to firm up the collection process and curb tax cheating. No one is more concerned about tax cheating than those of them who compete honestly. They are skeptical of the long-term effect this change in collection would have on those who are committed to tax improprieties. If we are wrong and the legislative body is convinced that a significant amount of tax will surface as a result of this legislation, then he suspects that would facilitate their second option which would be to increase the collection fee so that an amount would be available to off-set the minimal amount of increased administrative costs associated with bringing another entity into the tax collection loop. An increase would allow the 2% fair compensation to lawful jobbers and dealers to remain unaffected. Finally, they accept a reduction in the collection fee if a mechanism were put in place to deduct uncollectible taxes in order to eliminate the financial risk which is presently borne by this industry alone. He volunteered to answer any questions whereupon Ms. Brower stated she was having difficulty understanding one point and asked Mr. Haycock to refer to Section 25. She stated the way the law reads at this point is that the fee referred to is a collection fee rather than a hedge against bad debt or whatever problems he is experiencing. Therefore, she has a problem looking at it the way he is. Mr. Haycock explained he is looking at that provision in a common sense way and that is, because his business is at the collecting level they have the obligation to pay the tax that ABC Trucking Company should pay. They have an obligation to pay that to the state, whether they pay them ultimately, or not. Ms. Brower asked if they would continue to be collecting this tax and was assured by Mr. Haycock, they would continue to be collecting and charging even if this bill passes. They will continue to have the financial liability. He stated he is not suggesting that the 2% is a complete offset but the 2% is the only benefit they have. Ms. Brower interjected, as the bill reads, the 2% is for making tax collection and if they will still be collecting the tax, we will have two entities collecting it. Mr. Haycock amended her statement by explaining we would have two entities remitting taxes; they will be remitting to the suppliers who will be remitting to the State. From the suppliers' position, they have no financial risk. They must remit to them no matter what happens and in the bill, if, in the unlikely event his company filed bankruptcy and they owed them for some product, they have the ability to deduct that from the state. They do not have the ability and they would love it, and that might be one option worth looking at. Remove the 2% and just allow the tax amount on a bad or uncollectible debt, to be deducted from the tax. The next person offering testimony was Mr. John Cooper, with Allied Petroleum and Washoe Keystone Fuel. Mr. Cooper stated he shares the feelings of Mr. Haycock and added one item, that is, they sell a lot of heating oil. Under Federal guidelines, they have to have different colored fuels. As way of explanation, he stated there is a problem with transportation getting product into the Sparks terminal that services the Washoe County area. These two different products are coming in in two different colors as one is dyed for non-tax and one is clear for taxable purposes. It really creates a major problem for containment or inventory of the product. From time to time they run out of red diesel during the winter time when they have the highest draw for the home owners heating use. If the tax is moved to the point of the rack, in order to cover some of the customers they have for heating oil, they will either have to charge them the tax on the fuel or they will not be able to get that tax back. They will be faced with not servicing the customer or charging them the 28-cents or 29-cents per gallon additional tax. They already have a mechanism with gasoline in effect where permitted fuel suppliers pay the tax to the state. He feels this has been working very well without any problems and does not understand why it cannot be moved to that point and handled in the same manner. That would alleviate the problem with tax evasion and you can control it with the permittees who have the permits. He thanked the committee for their time and consideration. There was no further testimony to be heard. No action was taken on this measure but Chairman Stroth announced it would be rescheduled for a work session at a later date. Ms. Stroth advised the members Senator James, sponsor of SJR 14 had asked that we take no action on his resolution unless he could be present and, inasmuch as the Senate is still in floor session, we will postpone any testimony or action on SJR 14. There being no further business, the meeting was adjourned. RESPECTFULLY SUBMITTED: Nykki Kinsley, Committee Secretary APPROVED BY: Assemblyman Bob Price, Chairman Assemblyman Jeannine Stroth, Chairman Assembly Committee on Taxation May 11, 1995 Page