MINUTES OF THE

SENATE Committee on Taxation

 

Seventy-second Session

April 8, 2003

 

 

The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 1:37 p.m., on Tuesday, April 8, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4412, 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:

 

Senator Michael (Mike) A. Schneider, Clark County Senatorial District No. 11

Senator Raymond (Ray) D. Rawson, Clark County Senatorial District No. 6

Senator Terry John Care, Clark County Senatorial District No. 7

Senator Mark E. Amodei, Capital Senatorial District

Assemblyman David R. Parks, Assembly District No. 41

 

STAFF MEMBERS PRESENT:

 

Rick Combs, Fiscal Analyst

Ardyss Johns, Committee Secretary

 

OTHERS PRESENT:

 

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association

Larry M. Osborne, Lobbyist, Carson City Area Chamber of Commerce

Benjamin J. Blinn, Lobbyist

Rose E. McKinney-James, Lobbyist, Clark County School District, Power Light Corporation, and AstroPower

James F. Nadeau, Lobbyist, Incline Village General Improvement District

Scott K. Sisco, Interim Director, Department of Cultural Affairs

Helen A. Foley, Lobbyist, Clark County Health District

Jane A. Nichols, Ed.D., Chancellor, System Administration Office, University and Community College System of Nevada

Kendall Stagg, Lobbyist, Nevada Tobacco Prevention Coalition/Reno

Buffy Gail Martin, Lobbyist, American Cancer Society/Reno

Robin D. Camacho, Lobbyist, American Heart Association

Bonnie L. Parnell, Lobbyist, League of Women Voter’s Nevada

Jan Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada

Paula Berkley, Lobbyist, Reno-Sparks Indian Colony

Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association

Elizabeth MacMenamin, Lobbyist, Retail Association of Nevada

Jim J. Avance, Lobbyist, Nevada Marine Association

Linda Nelson

Candice Peetris

Cal Nelson, President, Cal’s Boat and RV

Terry R. Crawforth, Administrator, Division of Wildlife, State Department of Conservation and Natural Resources

Patty Wagner, Program Officer 3, Division of Wildlife, State Department of Conservation and Natural Resources

Charles Chinnock, Executive Director, Department of Taxation

Clay Thomas, Administrator, Field Services Division, Department of Motor Vehicles

Karen Winchell, Program Manager, Motor Carrier Division, Department of Motor Vehicles

Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, Incorporated

Alan D. Caldwell, Lobbyist, Independent Power Corporation

Steve G. Schorr, Lobbyist, Vice President, Public and Government Affairs, Cox Communications Company

Gardner F. Gillespie, Lobbyist, Cox Communications Company

Robert Gastonguay, Lobbyist, Nevada State Cable Telecommunications Association

Fred L. Hillerby, Lobbyist, DIRECTV

Michael W. Palkovic, Senior Vice President and Chief Financial Officer, DIRECTV

James T. Endres, Lobbyist, EchoStar, and McDonald Carano Wilson Limited Liability Partnership

Karen Frank, EchoStar

K. Neena Laxalt, Lobbyist, Nevada Propane Dealers Association

Bill Gregory, Lobbyist, Yellow-Checker-Star Cab Company

Kathy Augustine, State Controller

Christi Thompson, Chief Accountant, Accounts Receivable Section, Office of the State Controller

Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce

Samuel P. McMullen, Lobbyist, Retail Association of Nevada

Rich Rose, President, Cal-Neva 7-Eleven Franchise Owners Association

Russell Fields, Lobbyist, Nevada Mining Association

Danny Thompson, Lobbyist, Executive Secretary-Treasurer, Nevada State American Federation of Labor-Congress of Industrial Organizations

Glen Arnodo, Lobbyist, Culinary Workers Union Local 226 Hotel Employees and Restaurant Employees International Union

Linda Kincaid

Brian Ayala, Las Vegas Latin Chamber of Commerce

Van V. Heffner, President/Chief Executive Officer, Nevada Hotel and Lodging Association

Rachel Fletcher, Nevada Society of CPAs

Newton W. Freeman, Nevada Society of CPAs

 

Rossi Ralenkotter, Executive Vice President, Las Vegas Convention and Visitors Authority

Ann Price McCarthy

Birgit K. Baker, Administrator, Employment Security Division, Department of Employment, Training and Rehabilitation

 

Chairman McGinness:

We will open this meeting with Senate Bill (S.B.) 404.

 

SENATE BILL 404: Proposes imposition of sales tax on sales of items purchased by state and local governments for resale to public. (BDR 32-410)

 

Senator Michael (Mike) A. Schneider, Clark County Senatorial District No. 11:

During the 2001-2002 legislative interim, the Legislative Commission appointed an interim study to examine competition between local governments and private enterprises. Two members of the interim subcommittee are also here today as members of the taxation committee, Senator Townsend and Senator O’Connell. The legislation before you this afternoon, S.B. 404, is a measure regarding sales tax on items purchased by State and local governments for resale to the public. Throughout the legislative interim the subcommittee heard testimony regarding the general differences between government and the private sector. One of these differences discussed at several committee meetings is the exemption government has from paying sales taxes on items sold to the public. A good example of this might be right here in Carson City where a private souvenir shop must charge sales taxes on the same items that might be sold next door or down the street in many of the government gift shops.

 

Senate Bill 404 might look familiar to some of you. It essentially mirrors A.B. No. 611 of the 69th Session, which proposed to set forth the same sales tax requirements on government-operated retail establishments as private sector establishments. This proposed amendment to the Sales and Use Tax Act of 1955 would provide for the same regulatory environment and oversight on government when it competes with the private sector. As with all amendments to the Sales and Use Tax Act, the measure requires the proposal to be placed on a Statewide ballot for approval or disapproval by the voters of the State. It was Question No. 7 on the 1998 ballot (Exhibit C). If S.B. 404 is passed, the following question will be submitted to the voters at the 2004 general election:

 

Shall the Sales and Use Tax Act of 1955 be amended to impose the sales and use tax upon items purchased by this state or by a local government or local governmental agency for resale to the public by the governmental entity?

 

In 1997, A.B. No. 611 of the 69th Session was approved unanimously in the Assembly and by a vote of 16 to 6 in the Senate and then submitted to the voters as ballot Question No. 7 on the 1998 general election ballot. The measure failed with 164,818 yes votes and 227,078 no votes.

 

During the interim study proponents opined that a more concentrated campaign addressing the merits of the measure, especially during this tenuous economic time, might result in a successful ballot question in 2004. They know valid revenue sources are lost when private businesses are displaced. This displacement is probably occurring under the current practice of exempting governments from paying sales taxes. Therefore, the proponents asked the interim subcommittee to request this proposal to provide a second try at getting this ballot question passed. Carole Vilardo, president of the Nevada Taxpayers Association, is here today to discuss additional details of this bill.

 

Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association:

The bill basically says if you are going to sell to a retail customer of a government, you should in fact collect the sales tax. It refers primarily to gift shops operated by government, such as museum shops and Nevada Magazine. The items sold in these shops in many cases are the same items sold by other privately owned souvenir and gift shops for which sales tax has to be charged. We believe as a matter of equity, government-run shops should collect sales tax on these items as well.

 

Explaining it to the voters becomes another issue. In section 5 of the bill, on page 3, there is an explanation of the question. On line 40, it says “certain analogous taxes.” Every election cycle where there is a sales tax question, I get calls from voters wanting to know what analogous taxes are. I would like to see the explanation of the question changed so it just says, “If this proposal is adopted, the Legislature has provided that the local school support tax and certain applicable local taxes on retail sales ….” It would be a better definition for the layperson. I would urge you to consider this proposal and put it on the ballot.

 

Mr. Osborne and I had a conversation along with a couple of other business groups trying to find a way to better explain the reason for this question on the ballot. We thought this time, rather than relying on what we sent out in written form to explain the reason, we would be a little more aggressive in trying to meet with some of the media and explaining in person.

 

Chairman McGinness:

I think someone brought up the question of surplus sales by cities and counties of desks, typewriters, old school buses, et cetera, from school districts. Would those types of sales be covered under this bill?

 

Ms. Vilardo:

Yes, as I read it.

 

Senator Neal:

The testimony Senator Schneider gave seems to be directed toward an entity functioning in what we might call a quasi-governmental capacity, such as the gift shop downstairs in this building. What about those particular sales coming directly from a governmental entity, or when you sell property, or the State is buying property? Would they pay sales tax?

 

Ms. Vilardo:

The language in this bill refers to items sold at retail. A State-to-State transaction would not fit within the current definitions because under chapter 372 of Nevada Revised Statutes (NRS) those types of transactions are exempt. Therefore, I do not believe it would capture this, but you made a point which I did not reference. There are government-run golf courses and ski areas. In fact, there was a newspaper story out of Douglas County about the restaurant at the golf course, which is tax-exempt. It had announced it was going into the catering business and had sent out flyers. There were a series of letters coming back and forth from restaurants in Douglas County who did catering and were extremely upset because the golf course restaurant was a government entity, and was therefore totally exempt from the tax. When you look at, on average, 7 percent tax, it can make a sizeable difference on some of these catering jobs.

 

Senator Neal:

So, we are only dealing with retail, not wholesale?

 

Ms. Vilardo:

Correct, and I believe that is correctly reflected in the bill.

 

Senator Neal:

Why would it be necessary then to amend the Sales and Use Tax Act of 1955 in order to do this?

 

Ms. Vilardo:

Because the Sales and Use Tax Act of 1955 carries a provision in NRS 372 exempting purchases made to or by a government. Since we are dealing with governments here and it is the 2 percent portion, it has to go to the voters to change in order to qualify that type of purchase.

 

Senator Neal:

Could we not change that without going to the voters?

Ms. Vilardo:

The Legislature previously has in fact exempted the local school support tax and the analogous taxes from provisions without going to a vote of the people. Only the 2 percent portion of the sales tax must go to a vote of the people. There are two issues. One is, do you want to leave the 2 percent out there so you have a bifurcated rate? Probably even more important, it is my understanding based on the Streamlined Sales Tax Act, by 2006 we will not be able to have these bifurcated exemptions. In order to be able to take part in the streamlined sales tax, we will have to eliminate all of the exemptions applying only to the local portion of the taxes.

 

Senator Neal:

In what way will the State be harmed by not changing this?

 

Ms. Vilardo:

I cannot say the State will be harmed. I think it is the business that is harmed, not the State.

 

Larry M. Osborne, Lobbyist, Carson City Area Chamber of Commerce:

We are here in support of S.B. 404 and I will share with you one of our experiences. The chamber of commerce built and moved into our building in 1988 right next to the Nevada State Railroad Museum. In order to cover some of our expenses in providing staffing and keeping the visitor information center open, we opened a small retail gift shop. We were very small and did not do a great deal of business, but we did generate approximately $5000 annually in sales tax dollars to the State. The railroad museum right next to us operated a much larger gift shop and purchased the identical items we purchased from the same vendor and sold them at the same price.

 

The chamber of commerce, even though we are a 501 Internal Revenue Code (c)(6), a nonprofit, we are not tax-exempt. We have a business license, we pay property taxes, we pay sales taxes, and we collect the sales taxes. On several occasions we had someone buy something in our gift shop and then go over to the railroad museum and find they could buy it cheaper because there was no sales tax. They would then bring it back and return it at our gift shop. These were not large expenses but on a $50 purchase they could save $3.50. We were therefore at an unfair advantage competing with a government-run retail shop. Not only were we at a disadvantage, but also the State then lost that revenue.

We are no longer in that business. Last year we sold the gift shop and our office spaces to the Carson City Convention and Visitors Bureau who now operates the gift shop. Because they are a local government entity like the museum, neither one of them charge the sales tax and the State has again lost that revenue.

 

Senator Neal:

Do you think when the law was put into effect the people did not understand this?

 

Mr. Osborne:

I am not sure about when the law was put into effect. When the original sales and use tax law was put into effect, I do not believe government entities were really involved in the private-sector businesses. When it was put to the voters last time, like Ms. Vilardo said, as a private sector, we did not do as good a job as we could have explaining it. When I asked people why they had voted against it, they were against more taxes. I think if this goes before the voters again we can do a much better job of showing people this is not just more tax. It could be more clearly explained that this would require a government entity operating as a business to play by the same ground rules as the private sector businesses.

 

Senator Neal:

Have you not had such a referendum put on the ballot?

 

Ms. Vilardo:

The 1997 Legislative Session passed it and it was put on the ballot in 1998.

 

Senator Neal:

And it passed?

 

Ms. Vilardo:

It passed both the Assembly and the Senate but the voters did not see fit to pass it. I think part of the problem was in the way it was worded. If you remember in 1994 because of a question that arose, there had to be a clarification on charities put on the ballot. Because of the way it was worded, it was defeated the first time around until it was reworded during the 1995 Legislative Session and better explained why the exemption should be allowed. Tax law on a ballot has been an ongoing problem because of the limitations in trying to explain it. Most people know they pay the tax, but they do not understand the nuances behind it.

 

Senator Neal:

So, I assume then we are hoping the voters have forgotten after about 6 years and we are sending it back to them to see whether or not they pass it this time.

 

Ms. Vilardo:

I hope what happens is what happened with the charity. I hope we can go back and get the explanation cleaned up so the voters understand it.

 

Senator Tiffany:

When you considered a government business, does that denote only if they have a business license? Does it make them a business in the retail business?

 

Ms. Vilardo:

We are not talking about retail business per se for government. What we are talking about is when government goes into the resale business at the retail level.

 

Senator Tiffany:

If school children were doing fund-raisers by selling candy bars, would it be considered a retail business?

 

Ms. Vilardo:

I do not believe those children are classified as government as it is identified in the bill.

 

Senator Tiffany:

So, would they fit into what we are talking about?

 

Ms. Vilardo:

No, they would not. That was not the intent so I think it would be a good clarification.

 

Chairman McGinness:

I am going back to my original question. Look at line 25 on page 3, “purchased by this state or by a local government or local governmental agency for resale to the public.” In my mind it is referring to items such as cups, hats, or tee shirts I buy specifically to resell to the public. It does not mean something like a school bus bought by the school district and used for 10 years and then resold to the public because it was not purchased for resale.

 

Ms. Vilardo:

You may be correct. It would probably be a good idea to get a clarification.

 

Benjamin J. Blinn, Lobbyist:

Is the hobby craft sold in the stores within the prison system taxable? When the inmate welfare fund is used for illiteracy, health education, and welfare, is it taxable within the institution and does it fall within this bill?

 

Rose E. McKinney-James, Lobbyist, Clark County School District, Power Light Corporation, and AstroPower:

The question we have is similar to the one Senator Tiffany raised. We have taken a look at the bill and have a question with respect to the definition of “public” and whether or not it would include school districts. Would it include students engaged in the sale of various items for fund-raising as well as our meal services? We simply are struggling with whether or not we fall within the bounds of this measure. If in fact we do, it then raises a series of questions with respect to accounting and how we make the distinction, which in turn may result in some additional fiscal implications for the district. My guidance here today was to come to the committee and ask for an exemption from this measure. However, if there is another way to address it, then I will certainly defer to your judgment.

 

James F. Nadeau, Lobbyist, Incline Village general Improvement District:

I am representing a couple of different clients, one being the Incline Village General Improvement District. It is the general improvement district at Lake Tahoe and it provides a variety of services, including skiing and golf. This bill would have a serious impact on the income we receive from the variety of services we provide. We do not provide only services; for instance, we have pro shops in both the ski area and at the golf course. We have beach concession stands, and a variety of those types of things this change in the sales tax would impact.

 

How would this impact the citizens of Incline Village? The money accumulated goes toward deferring some of the expense on the programs in which they are involved. We think it would initially have about an $80,000 a year impact just on our golf course alone.

 

Senator Townsend:

What specifically would cause an impact of $80,000 on your golf course? Be very specific.

 

Mr. Nadeau:

I can get the numbers broken down for you, but there was approximately a 20 percent impact just on the anticipated gross sales.

 

Senator Townsend:

You are going to lose 20 percent of your sales in your pro shop?

 

Mr. Nadeau:

That is what I am told. Yes.

 

Senator Townsend:

So, you are saying they are telling you if we pass this and then the public approves the measure, the identical shirt sold in Incline Village in their golf store, that are sold in the golf stores at Montreaux down the hill and Northstar which is around the corner, you are going to lose 20 percent if you charge a sales tax?

 

Mr. Nadeau:

That is what they have indicated to me.

 

Senator Townsend:

You guys have a lot of guts up there. You have got to be kidding me.

 

Mr. Nadeau:

We are also concerned regarding the point at which the sales tax comes in. For instance, we provide a staff dining center for both visitors to the facility and the employees we use with our culinary arts program to assist inmates in learning how to deal with the variety of food preparations and that type of thing. Will the tax apply to that facility also? The cost of it is really a break-even cost. It is not a situation where there is a profit necessarily, and if there are profits, those profits go back to the inmates’ funds and the culinary arts program.

 

Scott K. Sisco, Interim Director, Department of Cultural Affairs:

I was not planning to testify today but I did want to clarify just a couple of things. First of all, the Department of Cultural Affairs has five State museums with so-called gift shops, or museum stores within them. They are not quite the same as competing with the souvenir shops. Just prior to coming over here for this bill today, I asked for the State fiscal year 2002 total sales figures. Sales totaled $451,350, which means we would have collected about $31,000 in sales tax had this been law at the time. However, unlike private gift shops, our staffing levels come from the General Fund. In order to handle this new requirement it would cost about $36,000 a year to start to collect that $31,000 per year.

 

Another point I would like to make is the gift shops were originally set up and managed by the Board of Museums and History specifically to create funding for projects for which this body does not have enough funds. For example, 2 years ago, the Board of Museums and History granted $50,000 to school districts to bus school children in and out of the museums for Nevada education purposes.

 

There is a third issue with which I have some concern as well. The Nevada Historical Society has tens of thousands of photographs owned by the State. We did not buy those for the purpose of resale, but people do come in on a regular basis and purchase them for family purposes, research purposes, or other things. I do not know how the sale of those would fit into this whole thing, but it is a point I did want to particularly address.

 

The museum stores are not here to make a profit to compete against anybody. They make a profit to provide programming for which funds are not available from any other source. With that said, we need all the taxes and revenue fixes we can get. I am not necessarily here to oppose or support this bill but I did want to educate you just a little on what the museum stores do and why they do it.

 

Chairman McGinness:

Do you think your sales would be impacted so significantly it would cause you to have to cut programs?

 

Mr. Sisco:

No, not at all. When people stop in the museum store on the way out, they want to get a postcard, coffee mug, or souvenir for having been there and we do not think it is going to cost us a single dime in sales. Our concern though, is that the income to pay for it comes from the General Fund.

 

Senator Coffin:

I sit on the finance committee and with my experience in retail sales I know it really takes very little effort to add a tax to a transaction. It also takes very little effort to prepare the monthly sales tax return and submit it to the State. I am curious how you figure you are going to need to add a position for this.

 

Mr. Sisco:

We have seven museums, five of which currently have stores and we are working on adding stores to the other two. They are currently run by volunteers and docents, none of whom have the accounting experience necessary to comply with these requirements. We think we could do it the most cost‑effective way by adding one half-time position at the division administrators’ office level to collect.

 

Senator Coffin:

You really do not need any experience to do this kind of transaction. I had never been in retail business before and if I could do it, your docents could do it, since they are frequently people of higher intelligence than you and I. They just have come from another life. I am telling you this to reassure you it will not cost you $36,000.

 

Mr. Blinn:

You forgot another matter. All of our inmate systems donate blood too which is all for resale. I think the inmate blood would be a good thing to tax. I know the inmates would not mind.

 

Chairman McGinness:

Since there is no further testimony, we will close the hearing on S.B. 404, and open the hearing on S.B. 461.

 

 SENATE BILL 461 Increases tax on cigarettes and revises manner in which revenue from tax is allocated. (BDR 32-259)

 

Senator Raymond (Ray) D. Rawson, Clark County Senatorial District No. 6:

A copy of my remarks is being distributed to you (Exhibit D). There are nine members of the Task Force for the Fund for a Healthy Nevada and the proposal to bring this bill draft forward was unanimous. The last raise in the tobacco tax was a 20-cents per pack increase in 1989. You have also been given excerpts from a Microsoft PowerPoint presentation titled “Tobacco Taxation” by Frank J. Chaloupka, Director, ImpacTeen, University of Illinois at Chicago (Exhibit E). The biggest increase in smoking now in the State of Nevada is in the teen to young adult category. I have also given you a copy of the results of a study showing that the price of tobacco also has an effect on decreasing the use of marijuana (Exhibit F). The last packet shows anticipated state cigarette excise taxes in each state as well as an estimate of the additional revenue that would be raised by imposing the tax increase on cigarettes (Exhibit G).

 

We had another bill, Assembly Bill (A.B.) 378 of the 71st Session, that set as a goal the doubling of nursing graduates by 2006-2007. A. B. No. 378 of the 71st Session is essentially held up because of a lack of revenue to be able to deal with it. We are told we could hire 800 nurses in Nevada today if we could find them, so it is a serious issue.

 

Senator Rawson:

I know earmarking is a foreign concept, or at least a discouraged concept by our tax committees. However, the health effects of these substances are very costly to our State. We estimate over $90 million a year in Nevada, so it may be only reasonable for the product causing so much impact on the General Fund be involved in some of the solution.

 

Senator Tiffany:

Did you say 20 percent of the distribution would go to the scholarship fund?

 

Senator Rawson:

Yes.

 

Senator Tiffany:

The first year, would approximately $35 million go into the scholarship fund?

Senator Rawson:

I think it is about $20 million. Essentially there would be a new $100 million for the fund.

 

Senator Tiffany:

So, the new dollars would not be $174 million?

 

Senator Rawson:

It would be $102 million net.

 

Senator Tiffany:

When you say local government, are you thinking about local school tax support?

 

Senator Rawson:

No, the local government tax distribution account.

 

Senator Tiffany:

When you talked about the health care profession, you have dentists, nurses, nursing assistants, respiratory therapists, and registered nurses. How did you happen to choose those as opposed to maybe physicians or physician assistants?

 

Senator Rawson:

They are just enumerated. It would be for all health professions. Maybe it is not stated in the bill, but the committee was interested in all of the health professions.

 

Senator Tiffany:

I am assuming you would want the Board of Regents to set all of the criteria like what we looked at with the millennium scholarship, criteria like what the percentage of grade point had to be, and what happens if they do not stay in school for 4 years, et cetera. You would have a board to adopt those types of regulations.

 

Mr. Blinn:

I think this is a good bill. I think another thing I would consider is instead of making this a scholarship, you could make it a loan. You might consider some kind of a bonus for anyone who practices medicine in this State for 5 years or more. I am definitely in favor of the bill.

 

Helen A. Foley, Lobbyist, Clark County Health District:

Recently an Illinois judge ordered Philip Morris Companies Incorporated to pay a $10.1 billion penalty for misleading smokers by marketing its low-tar, light brands as a safer alternative to regular cigarettes. Philip Morris announced it would appeal the decision. In order to appeal, the judge is requiring Philip Morris to post a $12 million bond. As it is done in other states when faced with massive bond requirements, Philip Morris attempted to get the state’s legislature to pass a bill that would reduce the amount of the bond. On Thursday, a panel of Illinois lawmakers denied a proposal to permit Philip Morris to reduce the bond requirement.

 

As a result, Philip Morris is now claiming it may not be able to pay its share of the tobacco settlement money due to Nevada on April 15, 2003. This payment is used to fund the Millennium Scholarships and the grants from the tobacco task force. If Philip Morris does not pay, the tobacco settlement receipt to Nevada will be cut in half. Whether or not they actually fail to make the payment this year, or whether the endless stream of court suits result in Philip Morris or others reneging on future payments, this development underscores the unreliability of these revenues. While the Legislators debate taxes and tax policy, they might consider whether cigarette excise taxes or the settlement funds are more reliable sources of State funds to pay for these health care costs.

 

If the Millennium Scholarships and the Fund for a Healthy Nevada dramatically decline, will the State stop providing scholarships and grants, or will these obligations be added to the burden of the General Fund? Who will then pay for Senior Rx? Who will then pay for the child health programs? The medical costs of smoking continue even though these reimbursements for past State medical expenditures have become in doubt. The Centers for Disease Control and Prevention estimate Nevada pays $96 million in Medicaid payments for their share of the cost to treat sick smokers. It is time for smokers to bear the cost of their health care expenses. It is grossly unfair to rely on the vast majority, 71 percent of nonsmoking Nevadans, to foot this bill. Every poll taken in Nevada verifies that cigarette taxes are the most preferred taxes you are considering raising this session. As the budgets tighten alongside skyrocketing medical costs, it is simply unfair for lawmakers to even consider cutting health and human service programs while at the same time subsidizing smokers’ bad choices. Those Nevadans who choose to exercise their right to smoke should be required to assume the responsibility of paying for their poor choice. We urge you to raise the cigarette taxes.

 

Jane A. Nichols, Ed.D., Chancellor, System Administration Office, University and Community College System of Nevada:

I am here today to support the portion of the bill that would provide funds for scholarships to students enrolled in programs to become health care professionals. We are very aware of the needs of Nevada, particularly for nurses, but for all health care professionals. We are also aware of the need for scholarships if we are to have any hope of getting the number of students in Nevada who wish to become health care professionals able to be successful in getting their degrees and certificates in those fields. We would ask you to broaden the definition in the bill so it is a broad-based definition of health care professionals and would include, for example, physicians. If this bill were to pass, we would be anxious to work with you through the Board of Regents in establishing the policies for its implementation.

 

This last biennium, we were given $96,000 for a loan program for nursing students. The loan was to be forgiven if the students stayed in Nevada and worked in high-need areas, which at the current time is all of Nevada. It has been a very successful program but the waiting list for those loans is lengthy and it did not come anywhere near meeting the demand and the need. It was a situation in which we did not have time to get the word out. This program is modeled after the Millennium Scholarship. I think it would be successful in letting our young people and our men and women of all ages who might want to become health care professionals know the State can help support them in achieving that goal.

 

We particularly like the part of the bill saying you must be a full-time student. We have seen enormous changes in the success of our students with the Millennium Scholarship requirement for students to be full-time at the universities. We think this would have the same impact in getting students through programs quickly and in enabling students to be successful. I simply want to express my support for the task force’s concern for having more health care professionals in Nevada and pledge to you our cooperation if this were to go forward.

 

Senator Neal:

There was a poll on gaming addiction done at the beginning of this year by the University of Nevada, Las Vegas (UNLV). The results of the poll showed gaming addiction costs the State between $300 million and $459 million. It is now being questioned by the gaming industry and I would like to know if your university stands by it.

 

Dr. Nichols:

Our faculty, I believe in that instance, contracted to do that work. It is something they frequently do. The university system did not produce it and so I have no basis on which to judge the research.

 

Senator Neal:

Well, it came out as a UNLV poll.

 

Dr. Nichols:

Normally, if it is work I produced or our office has produced, I can verify for you the validity. But in this case, I think the faculty themselves would have to speak to that.

 

Kendall Stagg, Lobbyist, Nevada Tobacco Prevention Coalition/Reno:

I want to get a few very critical points on the record. We have four very serious problems here in Nevada, all of which can be solved by this bill. We have the highest rate of smoking in the country per capita, we have a severe nursing shortage, our health care costs are rising dramatically, and we have a very serious budget problem, all of which can be solved by this bill. My opponents will tell you excise taxes are unfair to low-income families and they cause smuggling. There are a few things I would like to highlight.

 

Everything you have in front of you (Exhibit H. Original is on file in the Research Library.) is on discs we have been delivering to the press and to key Legislators throughout time. You will receive your last disc like this tomorrow because the information is changing very quickly. There was recently an article in The Wall Street Journal suggesting 21 states in the nation will raise their excise tax this year. The reason is because they know what we know, which is increasing the tobacco excise tax is a huge win for the State. It is a political win because the voters love this tax. It is a fiscal win because it can raise hundreds of millions of dollars in new revenue. And finally, it is a huge public health win. It will save thousands of lives and hundreds of millions of dollars in health care savings. It is worth noting this tax proposal on your desk is the only proposal on the table focusing on both sides of the ledger. That means we can look at the implications in cost savings and how we can perhaps in the future, streamline State government while additionally raising hundreds of millions of dollars in new taxes.

 

I want to give you a couple of examples relating to smuggling because it seems to be one of our biggest stumbling blocks when we get to this particular tax. First of all, I want to point out New Mexico just passed a 70-cent per-pack increase, which brought them from having one of the lowest taxes in the country to one of the highest. I think New Mexico is relevant because you can draw a lot of similarities in terms of geography and population distribution. I also want to point out California’s tax is expected soon to be about $3 a pack. It is definitely higher than ours now and it certainly is going to be much higher after they get out of their next session.

 

Finally, I want to point out Indiana, which borders Kentucky. As you might know, Kentucky has the lowest tax in the nation at 2.5 cents per pack. Effective July 1, 2002, Indiana decided to go ahead and raise their excise tax despite severe opposition from the industry and opponents saying it was going to prompt mass smuggling. If you could highlight any place in the country where smuggling might exist, it would be Kentucky and Indiana. From July to November 2001, there were about 302 million packs of cigarettes sold. In the same time period immediately after Indiana’s tobacco excise tax increase, there were about 50 million fewer packs sold. That is a 15.8 percent decline in overall consumption of tobacco products. Despite this, there was a 202 percent increase in state revenue.

 

Mr. Stagg:

California always had a lower excise tax than us. It was not until the late 1980s they decided to increase their excise tax and we have not followed suit. We did not have a problem with massive smuggling in the 1980s when we had a higher tax than California. I certainly do not think we will have that problem now.

 

Now my opponents can come up here and say it might cause smuggling and might cause revenue to go down. Let me go on record and assure you it has never, ever happened anywhere in the country. We have never seen an excise tax increase large enough to cause revenues to go down. Every state that has ever increased its excise tax has reduced consumption of cigarette products, saved hundreds of millions of dollars in health care savings, and simultaneously raised a great deal of new revenue.

 

In the packet I gave you (Exhibit H), there is a proposed amendment to this bill. This amendment simply shows what a number of other states are doing, which is considering $1 a pack, even Idaho. A $1 per-pack increase in Nevada would fully fund the Governor’s request for 70 cents in the General Fund out of the tobacco excise tax. It would provide at least $7.6 million in scholarships to students who enroll in programs to become health care professionals. It would raise at least $15.8 million for the Task Force for the Fund for a Healthy Nevada, which would allow us to bolster the Senior Rx program by over $10.4 million. I assure you, those dollars are very much needed.

 

Then finally, it would give us an extra $3.2 million for tobacco prevention and most importantly, tobacco treatment programs to help treat the people who are affected by this tax. That level of funding is worth noting. Even with all this additional funding it would only bring the State of Nevada up to one-half the level of funding recommended by the United States Centers for Disease Control and Prevention.

 

Senator Neal:

My friend who is associated with the Paiutes and the Shoshones would love this proposal because of their smoke shops. I gather your research did not take into account that people in the State would be lining up on the reservations to purchase their cigarettes.

 

Mr. Stagg:

Our projections are extremely conservative and account for some of the worst‑case scenarios presented by the tobacco industry. I will admit the people who have projected the data before you have been wrong. In every case where they have ever been wrong, the State raised more taxes than were projected, not less. As for the Indian reservations, they have a pact with the State of Nevada. When the State of Nevada raises its tax, they will raise their tax the exact same amount. I know for a fact there are Indian reservations in this State that would very much love to see this tax. I have already gone on record with the Task Force for the Fund for a Healthy Nevada stating if this tax is raised, the Indian reservations will put the additional revenue generated by the tax increase towards health care programs. There will not be any large difference between the price of cigarettes from regular retailers, or retailers on an Indian reservation.

 

Senator Neal:

The Indian reservations do not have an obligation to raise any taxes.

 

Mr. Stagg:

I can assure you they are strapped for cash. The only way they have money to run their governments and to raise revenue is pretty much through Indian gaming, which is not an opportunity here in Nevada, and excise taxes. I am willing to go on record in stating the reservations would absolutely raise their revenue and their taxes right along with whatever the State does.

 

Senator Coffin:

I have heard your testimony and other testimony, and over the years I have listened to a lot of zealous people who really truly believe what they have to say and will say anything to put their point across. I suspect well-meaning people in this country in the nineteenth century and the early twentieth felt the same way about alcohol. They persuaded through all means of their powers to try to get alcohol taxes increased to a confiscatory level. Gradually, the amount of privately made and or illegally imported alcohol exceeded the amount sold before because it became something desirous to have. It was the forbidden fruit. I look back on the history of my town, Las Vegas, and I see it was built on crime caused by the prohibition of alcohol and I see what is coming here. I see if you scratch a zealous person’s skin real hard who wants to raise these taxes to confiscatory levels, you get a neo-prohibitionist because they truly believe what they are doing is right.

 

Here we are in the middle of the session. We have to weigh these things, the ups and downs, the negatives and the positives. You have made a strong case for your position. I am not sure I agree with your guarantees. You may live long enough to see them happen. On the other hand, a lot of people who have lived 80 or 90 years saw how long prohibition lasted and saw the billions of dollars created and the crime that resulted.

 

I am willing to support a small tax increase on cigarettes for the good of the State revenue, but I am not going to support such a large increase it takes us close to confiscatory prices. It is an easy thing to do to the smokers because they are now a minority in the country and dying off faster than the rest of us.

They are easy to pick on but they do not like what they are doing and do not like being in the position they are in. I have to look and listen with skepticism on the kinds of testimonies given to us as “insure alls” and guarantees. I admire the sincerity and the zealousness with which these arguments are presented. I am also disappointed that so much of the tobacco money went toward the Millennium Scholarships instead of prevention.

 

Senator Rhoads:

Did you evaluate the possibility of what it is going to do on the Internet? I was talking to a gentleman the other evening at a reception. He buys all of his cigarettes on the Internet.

 

Mr. Stagg:

Internet smuggling, cross-border sales, and gray market sales are all included in the projections before you. We absolutely accounted for those and the projections we gave you are more conservative than what the Legislative Counsel Bureau produced. There are a number of states seeking to ban the shipping of cigarettes into the state to anybody other than retailers in order to prevent Internet smuggling. If Nevada were going to be involved in smuggling, it would most likely be a supply state, not a demand state.

 

Buffy Gail Martin, Lobbyist, American Cancer Society/Reno:

I will read from my prepared testimony (Exhibit I).

 

Robin D. Camacho, Lobbyist, American Heart Association:

While I echo the opinions of those expressed earlier, I do not need to echo the statistics. Our statistics are based on the Centers for Disease Control and Prevention. There would be fewer cardiovascular diseases and stroke deaths in the State of Nevada and lower incidence of heart attack and stroke, if you were to increase the excise tax on cigarettes. The State of Nevada would save approximately $5.7 million in cardiovascular disease and stroke costs.

 

Bonnie L. Parnell, Lobbyist, League of Women Voters Nevada:

We are very much in support of this bill both as an attempt to curb cigarette‑related health conditions as well as increasing our State revenue.

 

Jan Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada:

Our organization started a study of the tax structure and as part of the results of our study, our member groups voted on the taxes we felt should be increased. This tax garnered a great deal of discussion because we wanted to make our tax a more progressive tax and less regressive and of course you know this does tend to be a regressive tax. However, the overwhelming vote of our groups felt the importance of the health aspects of this bill overrode the issue of it being a regressive tax. Therefore, we do support this bill and all the bills proposing a tobacco tax. We think it is good health care policy, it is fair, and the tax on tobacco has not been raised in over 14 years.

 

I find it very interesting that 70 percent of all cigarettes are bought by the pack. It means people are paying a great deal of money per pack rather than thinking about the cost savings like we all imagine. There is concern about cross-border sales, Internet sales, black market, and Indian smoke shops. The reality is cigarettes are bought at the supermarket pack by pack regardless of the high price. I think some of those arguments can be debunked from that perspective and I urge you to pass this bill.

 

Paula Berkley, Lobbyist, Reno-Sparks Indian Colony:

The Reno-Sparks Indian Colony supports an increase in excise taxes for a very good reason. There is a State law allowing the tribe to collect excise taxes as long as it charges equal or greater taxes. The same State law requires the tribes to pass ordinances to reflect the same law. The two entities signed an intergovernmental agreement back in 1979. Since then tribes have been collecting excise taxes and have been required to charge equal or greater taxes. They are very motivated to do this because they are a government just like you and have to pay for services out of the taxes they collect. Even though the budget of the Reno-Sparks Indian Colony is much smaller than the State of Nevada’s, it is proportionately about the same. Therefore, it is not like there is some special windfall going to the tribes.

 

The tribes certainly do support an increase in taxes because they cannot raise their taxes unless the State raises its taxes. We have not raised taxes for 17 years. You can imagine where the State of Nevada would be in the same situation. We have gone ahead and purchased a piece of property to build a health clinic in anticipation of a cigarette tax increase. The health clinic will serve all Indians in northern Nevada. If they were not going to an Indian health clinic, they would be going to Washoe Medical Center.

 

Senator Rawson asked me to furnish you with a handout (Exhibit J) because he felt it gave a good overview picture. One of the charts shows the actual volume of stamps being sold and the other one shows the actual Nevada tax revenue. I think there has been some concern about what happens when you raise taxes. If you look at the 1980s when Nevada raised the taxes, the revenues went up. They took a little dip in the mid-1990s because there was a special discount provided to discount marketers like Wal-Mart, or Costco. When the convenience stores claimed it was not fair, they got the same deal and as a result, the volume started going back up. The negotiated settlement happened in the 1995‑1996 era when the manufacturers actually increased their wholesale prices. As you can see, despite that increase the revenue was increasing.

 

The price-sensitive nature of cigarettes is kind of a misnomer and I think even with moderate increases the revenues would continue to increase. I think it is only fair to consider the $96 million just in Medicaid dollars alone, being pulled from the General Fund every year, far more than the forty-some-odd million you are currently putting into it from excise taxes. Some adjustment there seems to be a step in the right direction.

 

Senator O’Connell:

Do the tribes keep what they retail to the general public, separate from what they retail to the tribes themselves?

 

Ms. Berkley:

No.

 

Senator O’Connell:

If they recognize smoking as a very serious problem among their own people, why then are they in the business of selling cigarettes? I mean they are going to build a hospital to try and take care of the problem, yet on the other hand they are feeding the problem. I do not understand the logic.

 

Ms. Berkley:

There is a real logic. If we eliminated the excise taxes we collect, 50-some-odd percent of our revenue would disappear. We would no longer have a local government. Other states have Indian gaming, which is where they make their revenue. We cannot have gaming here. Unfortunately, we were given excise taxes. We did not select excise taxes.

 

On the other hand, in defense of the Indian tribe, we have the strongest ordinances against child smoking in the State. We have a 100 percent better record for stings than the State does as a whole and we actually fine minors if they come into the smoke shop to buy cigarettes. The person selling cigarettes to a minor gets fired instantly. The first line on our radio commercials for the last 10 years says, “If you don’t smoke, don’t start.” I think considering we are in a lousy business, we are doing the best we can and better than anybody else.

 

Senator O’Connell:

Do you have any figures or tracking on alcohol abuse within the reservations? Will this hospital also help in that regard or is it going to be just for smoking‑related illness?

 

Ms. Berkley:

It is going to be a general health clinic. I do not have those numbers but I can get them. It is true, for example, Native Americans have the highest incidence of alcoholism. We also have the highest incidence of abstinence of alcohol than any other race, so when we have a problem we have it big, but we are the ones who have the least problem with it too.

 

Senator O’Connell:

Are you going to have the same testimony as far as the liquor tax is concerned?

 

Ms. Berkley:

We have been dry since the inception of the Reno-Sparks Indian Colony. We do not sell liquor, we never have, and we never want to.

 

Senator Neal:

I happened to be around when the Indian community did not own their smoke shops. In the early 1970s they began to take over the shops. They got into a big battle with the State because the State wanted to tax the cigarettes in interstate commerce. Each time they did the Indian colony took them to court and won. They then decided they did not want to have these battles so they reached an agreement to make the tax equal to that of the State. However, even though they put it into statute, the Indian colony still has the sovereign right to charge whatever they want for their cigarettes.

 

Ms. Berkley:

That is correct, but I think it is why we make intergovernmental agreements. In my 15 years working for the Indian colonies I have probably signed over 20 intergovernmental agreements and I try to do one every time I can because every time I do, it is another nail holding the State and tribal relationship together.

 

Chairman McGinness:

You say you have some of the toughest anti-smoking ordinances in your jurisdictions. Are they the same on every reservation or does each one set their own?

 

Ms. Berkley:

Each is a sovereign nation, so yes. I cannot speak for the rest of them.

 

Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association:

We are opposed to the bill. There are other bills before this committee and before this Legislature dealing with taxes. Our group will support what the Governor’s task force has recommended, which essentially is tying the rate to the Consumer Price Index (CPI). It would double the tax making it 70 cents a pack. We are supporting that kind of legislation.

 

We are absolutely opposed to earmarking. We are trying to fix our tax policy whether it is through the Governor’s proposal, the Business Representatives Group’s proposal, or others and this is not the right way to go. Another concern I have is with creating another scholarship entitlement program. This body has created themselves a mess with the Millennium Scholarship.

 

Elizabeth MacMenamin, Lobbyist, Retail Association of Nevada:

I would like to go on record today in opposition to Senator Rawson’s bill, although I do commend him for his intent. We have gone on record previously during this session as being open to the 35 cents a pack raise for taxes on tobacco without any harm to the State. Anything more we believe would be detrimental. We also have to agree with Mr. Krueger regarding earmarking. It is our position this money should not be earmarked.

 

Ms. Vilardo:

I am speaking in opposition to the bill. If you want to stop smoking, which has been testified to as the reason for this type of an increase, then raise it even higher. However the problem is, do not at the same time say you are going to get additional funds. Many problems have occurred in the states that have raised the cigarette tax. It is okay if they want to stop smoking but it is insane to think you can stop smoking by a rate of a tax and at the same time generate revenue to support new programs.

 

One comment was made about how the university studies showed cigarette taxes as being favored. The cigarette tax, the alcoholic beverage tax, and the gaming tax are the three most favored taxes to be raised because it is a case of “Don’t tax you, don’t tax me, tax the fellow behind the tree.” I urge your opposition on this particular bill. I think it is bad policy.

 

Chairman McGinness:

We will close the hearing on S.B. 461 and open the hearing on S.B. 464.

 

SENATE BILL 464: Revises provisions relating to vessels. (BDR 32-1240)

 

Jim J. Avance, Lobbyist, Nevada Marine Association:

This bill is a meritorious piece of legislation, which I can honestly say because this committee passed it out the session before last. Senator O’Connell then put it on the clerk’s desk because it fell under the category of those the Governor said he would veto because it was a tax bill. However, you did like it once and so did the Assembly. It got that far. In working with the Division of Wildlife and the Department of Taxation, I ran into two problems with the bill I want to bring to your attention. The Department of Taxation estimates this bill would generate in excess of $3 million in tax. The Division of Wildlife told me they had a fiscal note somewhere in the neighborhood of $400,000. Knowing it would be very difficult to get a bill from here over to finance and back with a fiscal note on it, I have worked to eliminate it. Senate Bill 464 is modeled after the same legislation that came forward in the last two session. Section 4 of the bill requires the Department of Wildlife to charge a sales tax on the transfer of boat licenses and boat registrations on what they classify as occasional sales. It goes on to indicate how they would be appraised. There is a book similar to what the Department of Motor Vehicles has on used vehicles.

 

Section 7 of the bill works on getting a rebate or discount for a boat traded in on the purchase of a new boat from the boat dealers. It recognizes when they sell the boat, there is going to be a sales tax on it anyway, so they are not getting out of the tax. They are merely able to reduce the tax they charge the customer based on the cash value of the trade-in boat. The people from the Department of Motor Vehicles have indicated there is a problem with section 9 of the bill and we are in agreement with them. They want to take the word “vessel” out of the Department of Motor Vehicles section of this bill. Referring to section 11, there is currently a section in federal law on documented vessels. These are vessels on file with the federal government and under Nevada law, they are not taxed in Nevada.

 

Finally, per section 13, the Division of Wildlife would retain 6 percent of the fees collected to offset their management costs. A proposed amendment has been given to you (Exhibit K). What I tried to do in this amendment was remove the cost effect to the Division of Wildlife with the hopes of eliminating their objections by way of their fiscal note. In working down through the amendment, my typewriter did not have a bracket so what you see in parentheses are words to be removed in order to solve those problems. We changed the word “shall” to “may.” We also took out the requirement of a notarized bill of sale and the part requiring the bill of sale to be witnessed by an employee of the division.

 

Mr. Avance:

In section 5, subsection 5, we eliminated the need for the Board of Wildlife Commissioners to establish a schedule of depreciation. We took section 6 out altogether, which has to do with an appraisal. The section we took out is one requiring an employee of the division to go out and physically look at the boat and determine its value. If you look at the second page of the amendment, I had indicated there was nothing wrong with section 9. However, it is the section the Department of Motor Vehicles said caused them some problem. We are in agreement with them to eliminate the word vessel. On the third page, section 13, subsection 2, the bill drafters inadvertently left in the word “motorboat,” which we took out and changed to vessel wanting to capture sailboats at the same time. When it first came out of bill drafting, it had the word motorboat all through there. In section 14 are the applicable sections for creating regulations and effective dates and those are in accordance and suggested to us by the Division of Wildlife.

 

Senator O’Connell:

In section 13 you have the Division of Wildlife collecting the tax and you have the administration of the tax by the Department of Taxation. The tax department collects most of our taxes. Also, you show a 6 percent amount collected to cover your administrative costs. Six percent is pretty high.

Mr. Avance:

It was discussed and worked out with the Division of Wildlife and taxation in a joint phone call and this is the way they wanted it. The tax ends up going from wildlife to taxation but the boat and the license comes from the Division of Wildlife and they administer the number and the system on boats. I can also tell you the Department of Taxation has indicated they may be willing to administer the whole bill.

 

Senator O’Connell:

Since the Department of Taxation is our revenue department I would think it would be the logical department to collect the taxes.

 

Senator Neal:

Looking at the bill on page 2, section 4, line 16, it seems the sale of a vessel is conditioned upon an authorized appraisal. If you do not have one, then it seems to me none of this would apply. Am I reading it correctly?

 

Mr. Avance:

It does two things. “Authorized appraisal” as defined in the bill is an appraisal from the book. They could either use the authorized appraisal, which in this case is a book list of known boat manufacturers and what those boats are worth, or the bill of sale. Those are the two things that would cause the sale to go forward and would then go, under this bill, to the Division of Wildlife.

 

Senator Neal:

I am referring to where it says “In computing the tax on the sale of a vessel by a seller who is not required to be registered with the Department of Taxation the Division shall, if an authorized appraisal is submitted:” Who submits the authorized appraisal?

 

Mr. Avance:

The authorized appraisal is granted or made at the desk of the Division of Wildlife. They would then have the book or computer disc with the information on it. They would make a determination the same way the Department of Motor Vehicles currently does on automobiles.

 

Senator Neal:

When you use the term “is submitted,” my question then becomes what happens if it is not submitted?

Mr. Avance:

Then it goes to the bill of sale, which would be required to show the price for which the boat was sold.

 

Linda Nelson:

I represent the Nevada Marine Trade Association. We are in support of this bill, for several reasons. First, it would bring in money for the State of Nevada, but it would also be fairer to the consumer. When someone buys a boat from a dealership, the dealership collects the sales tax. When it is bought from an individual, currently there is no sales tax on that purchase. This makes it more desirable to buy from an individual, thus taking away from the businesses of Nevada.

 

We have a small tax trade allowance and currently, if a consumer buys a boat costing $10,000 and has a $5000 trade, he pays sales tax on the entire $10,000 even though he has already paid the tax on the used boat he is trading in. In this proposal, he would get an adjustment because of the trade-in and would only have to pay tax on the difference.

 

Chairman McGinness:

Is this the same way it currently works with motor vehicles?

 

Ms. Nelson:

It is similar but not exactly the same. They go by a percentage rather than the whole tax. Another point I want to make is we cannot sell a boat to a nonresident without collecting Nevada sales tax. While these are minimal sales to us, they are incremental to the business as far as putting money into the economy. Right now they either have to pay a sales tax, or we have to physically take the boat across the State line and deliver it to the person. The boat trailer already has a permit and they can take it across the State line without collecting sales tax, but not the boat.

 

Chairman McGinness:

So, your proposal would be if you are selling the boat to a nonresident, you do not collect the sales tax the individual might be obligated to pay in the state to which the boat is being transported.

Ms. Nelson:

Correct. We also agree with the section requiring the registration of documented vessels in the State of Nevada. They are already supposed to be paying their sales tax but are getting out of it because they are documented. They went over to California, for example, and bought a large vessel which could be documented. They then brought it into the State of Nevada, but because they did not have to register it here, they are not being caught for their sales tax. Rather than paying voluntarily, the Department of Taxation has to go out and find those people.

 

Chairman McGinness:

Do they currently have to license a boat with the Division of Wildlife?

 

Ms. Nelson:

If it is documented with the United States Coast Guard, they are not required to register it with the State of Nevada, which hurts dealerships and hurts our economy. Not only are we losing the sales tax but we are also losing the sale. Why would they want to buy a $100,000 boat from us and have to pay in excess of $7000 in tax when they can buy it in another state and bring it here without having to pay any tax? It is an unfair advantage for California, Utah, Arizona, or wherever they might want to go to buy it.

 

Candice Peetris:

I represent Las Vegas Boat Harbor and Las Vegas Bay Marina. I am a fourth generation in the family business, which has been in the Lake Mead area since 1957. We are in support of S.B. 464 and agree with Ms. Nelson’s testimony.

 

Senator Neal:

Can you not take a boat right across the lake to the Arizona side and sell it?

 

Ms. Nelson:

We tried that. We thought we could take it across Lake Mead, which is the Arizona state line, but the Nevada Department of Taxation said no. They said we had to prove we were there. Now we get a notary or witness to sign a confirmation of our having delivered it.

Cal Nelson, President, Cal’s Boat and RV:

I spoke about this same bill back in 1999. I am very much in favor of S.B. 464. I have to deal with tax laws and their implications on my business on a daily basis. I agree with everything in this bill.

 

Mr. Avance:

On the last page of the proposed amendment (Exhibit K), I am trying to solve, at least for this committee, the problem of the fiscal note coming up here in a few minutes. What I have asked to do is change the amount the Division of Wildlife would retain from 6 percent to 10 percent. My purpose was to alleviate the fiscal note so you would not have to send it to finance. The bill then could conceivably get out of this House and over to the Assembly side where everything can be fixed and we would have more time. Recognizing you only have 2 more days this week to solve these problems, it may not be a sound policy but it is a way I thought might solve the problem and get the bill moved.

 

Terry R. Crawforth, Administrator, Division of Wildlife, State Department of Conservation and Natural Resources:

We are the boat agency in the State of Nevada and we use the funds received to create a five-part program in boating safety, boating education, titling and registration, navigational aids, and we create access facilities. We have addressed similar legislation for the last two sessions and retain the same concerns we have expressed in the past. We are very proud of our service record for the boater in the State of Nevada and keep our registration and titling processes at a minimum. Also, this year we have now instituted a system where you can register your boat on-line.

 

Patty Wagner, Program Officer 3, Division of Wildlife, State Department of Conservation and Natural Resources:

I will read my testimony (Exhibit L) and then entertain any questions you might have.

 

Senator Neal:

Is “motorboat” defined in the statute?

 

Ms. Wagner:

Yes, it is. A “motorboat” means any vessel propelled by machinery whether or not the machinery is the principal source of propulsion. “Vessel” means motorized and non-motorized watercraft.

 

Senator tiffany:

Would personal watercrafts be considered in this as well?

 

Ms. Wagner:

Actually, anything with a motor. It could be a float tube with a motor.

 

Senator tiffany:

Are you supposed to go to the National Automobile Dealers Association handbook and find a value for these? They are not in there.

 

Ms. Wagner:

I am not sure.

 

Senator tiffany:

Are canoes in there?

 

Ms. Wagner:

I am assuming some of them would be. I can tell you we did test it. When we looked up a 1973 Boston Wheeler made by a brand-name manufacturer who is still in business, it took us over 15 minutes to find it and then we had to look up the motor, so it is quite a process.

 

Senator tiffany:

Is this normal procedure? It sure seems like it is pretty complicated. Would your transaction time be like the Department of Motor Vehicles?

 

Ms. Wagner:

Yes.

 

Charles Chinnock, Executive Director, Department of Taxation:

Our position is neutral with respect to this bill. We are, however, in favor of sections 10, 11 and 12, regarding the federally documented vessels. It allows us to track and trace with respect to taxes. I know the Division of Wildlife had a concern about section 13 as far as the collection of taxes. We would also have concerns with it if there were some responsibility for us to actually have to do that kind of collection of taxes.

Senator O’Connell:

If you did indeed collect the taxes, would your concern be the workload of collecting it?

 

Mr. Chinnock:

Yes, workload and additional manpower.

 

Senator O’Connell:

Would you agree if this bill should pass, yours would be the logical department to collect the tax?

 

Mr. Chinnock:

If we receive the tax from the Division of Wildlife and they are still responsible for doing the appraisals and collecting at their location, then there would be no additional costs to the department.

 

Clay Thomas, Administrator, Field Services Division, Department of Motor Vehicles:

The Department of Motor Vehicles (DMV) does have some concerns with this bill, especially in the areas pertaining to the agency itself. Those are contained in section 1, subsection 1, and are also contained in section 9 on page 5, lines 12 through 15. In particular, the addition of “or vessel.”

 

The DMV is void of any responsibility having to do with vessels as defined in this bill. The DMV does not register them, we do not inspect them, nor do we enforce any of the statutes applying to their operation. This bill, if passed, will then include DMV into the fold of additional responsibilities pertaining to the word vessel. I believe it may cause some confusion. In addition, the word vessel is all-encompassing as to the types of vehicles that can receive a movement permit. Those include kayaks, canoes, rafts, and boats and it concerns us to have that many types of vehicles for which we would be responsible for issuing a permit.

 

Last, the DMV over the last several years has made strides in reducing the number of customers coming into our office by finding other ways to service them. In addition, we have worked with our processes to reduce our wait times at the DMV. The average wait time for the DMV is currently 71 minutes for an average customer transaction. In some of our offices in Las Vegas, it exceeds 80 minutes. Adding additional responsibilities to the department would defeat our purpose of finding ways to expedite our processes and finding other ways to keep out customers. We do not believe it is necessary to include “or vessel” within this bill.

 

Ms. Nelson:

We have no objection to changing “vessel” back to motorboat.

 

Chairman McGinness:

We will close the hearing on S.B. 464 and open the hearing on S.B. 471. You have a bill explanation document in your packet (Exhibit M).

 

SENATE BILL 471: Revises provisions relating to certain taxes and fees regarding petroleum products and fuels for motor vehicles and aircraft. (BDR 32-584)

 

Karen Winchell, Program Manager, Motor Carrier Division, Department of Motor Vehicles:

I will read from my prepared testimony (Exhibit N) and then answer any questions you may have.

 

Senator O’Connell:

You said they receive a 2 percent rebate or they can keep 2 percent for the administration of the tax?

 

Ms. Winchell:

That is correct. The dealers and suppliers are entitled to retain 2 percent as a fee for collecting the tax and remitting it to us.

 

Senator O’Connell:

Has that number been in place for a number of years?

 

Ms. Winchell:

I am not sure of the date but it has been 2 percent since I started in 1989.

 

Chairman McGinness:

Do you support the amendment Mr. Krueger presented to us (Exhibit O)?

 

Ms. Winchell:

Yes, the department has reviewed his amendment and supports it.

Senator O’Connell:

Can you tell us if there has been much of a problem lately when they check the amount of gas still within the tank after the gas has been delivered as far as the amount of fuel delivered and the amount they have retained in the vehicle itself? I do not know if I am asking the question correctly, but do you have an idea of where I am going?

 

Mr. Krueger:

I think you are referring to our shrinkage allowance, which is a 2 percent shrinkage collection allowance. Our members are able to report net or gross gallons and it makes a big difference in Las Vegas where the fuel is delivered cold and gets hot. It gets bigger because it expands due to the heat. It is just the opposite up here in the north. I believe that was your question. There is still the shrinkage allowance or the correction factor, net or gross gallons. It is still a factor because of the way it is delivered at one temperature and becomes the opposite in the ground.

 

Senator O’Connell:

Is the shrinkage problem still a major problem or have we more or less gotten our arms around it?

 

Mr. Krueger:

It is a result of temperature. You buy the fuel at the refinery, it is delivered to you as so many gallons pumped into the tanker at one temperate. When it gets to Las Vegas in the summer, or vise versa in the north, it either expands or contracts so the number of gallons coming out of the transport could be more or less than what went in originally.

 

Senator O’Connell:

What I am talking about is signing off on what has been delivered without checking what has been delivered and then the truck moves down the road and is selling the gas again.

 

Mr. Krueger:

My mistake. I was talking about another issue. Yes, we do have our arms around it. There is a joint task force on tax evasion and I believe we have much better reporting by suppliers and dealers. I am aware of at least one prosecution and maybe more occurring because people falsified deliveries and documents of that nature.

 

Senator Tiffany:

Can you tell me why transporters have to get a license?

 

Ms. Winchell:

We wanted to be able to track all fuel coming into and out of Nevada. If everyone handling the fuel, exporters, transporters, suppliers, and dealers were required to obtain a license, we would have a way to verify they were reporting to us. As it currently stands, they are required to file a monthly report but since there is not a licensing requirement, we have no way of ensuring all the transporters are reporting to us.

 

Senator Tiffany:

What if they are just in Nevada as opposed to state to state?

 

Ms. Winchell:

It would be the same.

 

Senator Tiffany:

If somebody lives in Arizona and is a transporter to Utah, if he has to go through Nevada, he has to get a license because he travels across Nevada?

 

Senator Tiffany:

Yes, if fuel were being moved into or out of Nevada, a license would be required.

 

Senator Tiffany:

So, it is like our business tax with cities and counties. If you live in a county and you do business in every single city, you have to pay a business tax in each county as well as all the cities in which you do business. How much would the license be?

 

Ms. Winchell:

There is no fee.

 

Senator Tiffany:

They basically just fill out a form and sign it for you?

Ms. Winchell:

That is correct. We would just ask them to complete an application and we would issue them a license with a Nevada State seal.

 

Mr. Krueger:

We are completely supportive of S.B. 471. We support the language stating if you do not pay in a timely manner, you are not entitled to the collection allowance. Current law requires fuel suppliers to pay a very large bond based on volume. The bond is there to protect the State when someone goes out of business or does not pay their taxes. There was a provision requiring all the money collected from excise taxes go into a separate account in trust for the State. When we became aware of this, my question to DMV was what does “in trust to the State” mean? You cannot have an account my members and fuel suppliers cannot get to because they have to deposit and write a monthly check to pay the bill. A trust account, depending on what banker you talk to, has all sorts of different connotations. In working with DMV, we are suggesting, for those people who are habitually delinquent in paying their taxes on time, allowing DMV to simply mandate those people maintain a separate account, in trust for the State. I believe through regulation the department can define what “in trust” means.

 

Chairman McGinness:

Referring to the last lines of your proposed amendment (Exhibit O), to amend NRS 366.197, is this going to change the definition of a gallon of liquefied petroleum gas?

 

Mr. Krueger:

Yes, it is. It would capture more than $660,000 of revenue we believe is owed to the State.

 

Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, Incorporated:

We are in support of the bill. We have worked with the DMV with respect to the changes over the last 2 years so we heartily support the bill and the amendments proposed by Mr. Krueger.

Chairman McGinness:

We will close the hearing on S.B. 471 and open the hearing on S.B. 489.

 

SENATE BILL 489: Makes various changes to provisions governing exemption from local school support tax for systems that use renewable energy to generate electricity. (BDR 32-1135)

 

Alan D. Caldwell, Lobbyist, Independent Power Corporation:

Independent Power designs, sells, and services electric systems and solar thermal systems. I would like to begin my comments on this proposed sales tax exemption by quoting from a study just published yesterday by the Center for Business and Economic Research at the University of Nevada, Las Vegas (UNLV). The report was commissioned by the State Renewable Energy and Energy Conservation Task Force to determine the potential economic impact of renewables on Nevada’s economy. The study determined, “When 15 percent of electric needs come from renewable energy generated within the State, over 5000 jobs can be attributed to the renewable energy industry with an annual gross state product effect of $665 million through 2035.” That is over $21 billion cumulatively. The reason I mention this is I believe we need to continue to encourage the newly emerging renewable energy industry in this State and to help it take hold so it can become an increasingly important component of our State’s economy.

 

To this end, I would like to register my strong support for S.B. 489 as written. It includes two key improvements over the original legislation passed during the 2001 Legislative Session. The first is the extension of this law through June 2007 rather than the original sunset date of June 30, 2003 because these are not impulse purchases. These are very expensive systems and people need to plan ahead. The law itself as it stands does not have enough time to be exposed, to be recognized by the people who buy these systems.

 

The second improvement is the inclusion of solar thermal energy systems along with the other forms of renewable energy that were part of the original bill. There are two distinct types of solar systems, solar electric and solar thermal. The solar electric, the photovoltaic systems generate electricity while the solar thermal systems generate heat but because both systems offset the use of electricity or natural gas, both should be included in this legislation.

 

While this partial sales tax exemption does not financially benefit companies like mine, I can speak for our customers who are very appreciative of this gesture by the State to defray at least a small portion of the cost of their solar systems.

 

Senator Neal:

What makes this particular project so beneficial? We are being asked to take money from the local school support tax (LSST) that supports our schools which are in dire need right now.

 

Ms. McKinney-James:

We asked our fiscal analyst to take a look at this bill when we were told it would have no impact on the Clark County School District.

 

Senator Neal:

What do you mean it would not have an impact? You are taking away from the LSST, which is where you go to operate the schools.

 

Ms. McKinney-James:

Based on an analysis of the formula and how it is applied, we were told this measure would not have an impact on the Clark County School District.

 

Senator Neal:

You are asking for an exemption from the LSST, right?

 

Ms. McKinney-James:

Yes.

 

Senator Neal:

The LSST goes to the operation of the school system and the people you work with in the school district say this would have no impact?

 

Ms. McKinney-James:

I asked specifically for an analysis on the implications of this measure so I could feel comfortable in supporting the bill as I represent other clients, and that is the answer I received. I am happy to share with you a copy of the analysis.

 

Both Power Light Corporation and AstroPower, the companies I am representing on this bill, are photovoltaic companies and are in support of S.B. 489. In addition with your indulgence, I have been asked by my colleague, Neena Laxalt, who represents the Natural Lighting Company, Incorporated, based in Glendale, Arizona, to offer for your consideration a minor amendment to this bill. The amendment would change the language in section 1, subsection 1, paragraph (b) where it says, “solar or,” and have it read “solar or solar thermal energy system.” The company Ms. Laxalt represents uses a small photovoltaic unit to enhance their day lighting efforts and this would accommodate those day lighting systems.

 

Senator Tiffany:

When we were going through this renewable energy in the select committee, we had quite a discussion over what renewable energy was and was not. Would adding another item change the definition of renewable energy throughout all statutes?

 

Rick Combs, Fiscal Analyst:

That is not an area in which I am an expert but typically, when you make an amendment in one section of statute, especially in the tax statutes, it is only going to apply there. I do not think they are changing the definition, specifically in the statute. Therefore, I cannot imagine it having an impact on anything other than sales and use tax.

 

Senator Tiffany:

Would you check on that because it says, “Renewable energy means” and I just want to make sure we are not changing the definition, which would possibly impact past legislation.

 

Senator O’Connell:

Mr. Caldwell, how many of your customers have taken advantage of this exemption?

 

Mr. Caldwell:

On the solar-electric side we have had 133 customers and on the solar-thermal side, we have had 21. Up until now, the solar thermal customers have not had the exemption so we have collected the full tax from them.

 

Senator O’Connell:

Would you be able to give us any kind of an estimate about how much we have lost in taxes with the 133?

 

Mr. Caldwell:

Thirty thousand dollars per year. On the solar-thermal side, it would be a lot less since we have collected only about $7800 this year.

 

Ms. Vilardo:

Nevada Taxpayers Association is in opposition to extending the date to 2007 for two reasons. This bill, along with another bill to encourage economic development, came through this committee last year. Both bills originated because we were having an energy crisis and it was felt something was needed to encourage people to go to alternate sources of energy to help minimize the impacts on the electrical energy industry. For this same reason, the committee put a 2-year expiration date on the exemption. That being said, if it is the committee’s wish to extend this, I would recommend you not extend it past 2005.

 

You will be receiving a bill from the other House regarding the streamlined sales tax agreement. The Department of Taxation has been very involved in monitoring and representing Nevada as a participatory State to the streamlined sales tax agreement. The governing states involved with the streamlined sales tax cannot have bifurcated exemptions. This is a bifurcated exemption because only the local portions and the LSST are exempt, whereas the State portion is still collected on the 2 percent because it did not go to the voters.

 

Therefore, this will be problematic because at some point we are going to have to deal with all of these bifurcated exemptions. If you want to continue as a governing state for streamlined sales tax, you cannot extend it out this far.

 

Mr. Blinn:

I am in agreement with Ms. Vilardo.

 

Chairman McGinness:

We will close the hearing on S.B. 489 and open the hearing on S.B. 492.

 

SENATE BILL 492: Imposes tax on gross revenue that direct broadcast satellite television company derives from sales to subscribers in this state. (BDR 58-1322)

Steve G. Schorr, Lobbyist, Vice President, Public and Government Affairs, Cox Communications Company:

We are here in support of S.B. 492. The marketplace in which we operate as a company has become more and more competitive over the years. We have heard the word competition numerous times over the past few weeks and months, specifically dealing with companies like mine, and telephone companies. Competition in my business has indeed grown.

 

The direct-broadcast satellite industry has taken some 20 percent nationwide of the industry that at one time was cable television. Cable television is not necessarily a monopoly by its nature. Our numbers continue to decrease. Total penetration within the southern Nevada marketplace is now roughly between 60 and 65 percent. At one point, it was up to 70 percent because of the competition coming within the marketplace.

 

The problem is the playing field is not level. Cable communication companies like mine throughout the State are not on a level playing field. They compete with an industry that pays literally nothing to the State of Nevada. In 2002, Cox Communications in southern Nevada paid a total of $11.4 million. Those who oppose this bill will tell you the $11.4 million is compensation for rights-of-way.

 

I submit to you it is not compensation for rights-of-way because the money does not go for right-of-way management. It goes directly into the General Fund like any other tax supporting the community. It supports the firefighters, police officers, street repairs, and all those sorts of things.

 

As our numbers continue to decrease, their numbers continue to increase and yet they pay little or nothing for the State. Since 1998, $54.3 million in fees paid by Cox Communications have gone into the General Fund. We believe the State of Nevada can benefit as other states have, specifically Florida and North Carolina, by taxing customers of the direct-broadcast satellite industry similar to the way cable television customers are taxed.

 

The cable customer gets the same programming provided by the satellite company to its customers. However, the cable customer specifically pays 5 percent in franchise fees to the local government while the satellite customer does not pay any fees. That money is lost to the local government and lost to the State. It goes out of State and never at any time comes back in.

 

Cable companies also have to meet other requirements the satellite industries do not. We have to provide certain channels. In southern Nevada we provide up to 11 channels, 5 analog and 6 digital, including a community access channel. We have emergency alert system requirements, which are set forth by local activation. Satellite does not. It is a requirement and a cost for us to do business. We have to provide bidirectional fiber to specific sites located within the local governments and determined by the local governments. At the same time, we have to provide to each of the government buildings a single drop, at no cost to the government, so they can get the services. Providing services to the community is specifically part of our cost of doing business.

 

In 2002, the cost we had to expend in order to provide the services to the ever‑growing community in southern Nevada was $112 million. Since 1998, we expended $506 million to continue to expand our plant in order to get to the customers. That is over half a billion dollars just to continue the cost of doing business.

 

I want to give you a glimpse of what else we do in southern Nevada to make sure we provide to our community. In 2002 alone, we provided $1.6 million to local communities and organizations, both cash and in-kind. Each and every day we provide 24.2 hours of noncommercial educational programming to 121 public, private, and parochial schools at no charge. We provide 212 public service announcements for local nonprofit organizations. In addition, we pay $28,000 in fees to local government each and every day. On top of that our employees, our contractors, and our company pump $317,850 every day into the local economy. All we ask is for the playing field to be leveled.

 

We pay the 5 percent tax, which benefits local government. We think a similar tax should be paid by our competitors to benefit our State. It could mean as much as $10 million in a biennium. It is a tax currently utilized within Florida and North Carolina where it has been in place for more than a year and has not faced any legal challenges.

 

Gardner F. Gillespie, Lobbyist, Cox Communications Company:

I want to try to anticipate a couple of legal questions I think may come up today. We had a bit of a preview of the arguments presented by the direct‑broadcast satellite (DBS) companies in presentations before the Governor’s tax committee this summer and fall. They have suggested this statute would be unconstitutional. I have provided to you a general memorandum dated November 7, 2002 (Exhibit P), which generally addresses the constitutional issues. As Mr. Schorr said, similar legislation has been adopted in North Carolina and Florida and it has not been challenged by any of the DBS companies to whom it applies.

 

I want to specifically address the question of nexus. There is a constitutional requirement under the commerce clause of the United States Constitution that there be a nexus with the State before an out-of-state company can be taxed. I want to emphasize to this committee the two national DBS companies do have a nexus to the State. It is our understanding those two companies have independent contractors in the State who sell equipment as well as their services. There have been two U. S. Supreme Court decisions addressing this and one of them is shown in another memorandum I have provided for you dated November 25, 2002 (Exhibit Q).

 

I would also like to address the question of whether the franchise fees cable companies pay can be characterized as rent. There has been an argument made suggesting cable pays this 5 percent to rent the public rights of way. I wrote a law review article published in November in the Dickinson Law Review addressing this very issue (Exhibit R. Original is on file in the Research Library.). The concept that a municipality charges rent to utilities for the use of streets first appeared in a U. S. Supreme Court decision in 1893. When it was raised to the U. S. Supreme Court on rehearing, in fact common law makes clear that municipalities do not rent their streets. They own their streets in trust for the public. The streets cannot be rented to the public and the use of the streets by utilities is a public use. On rehearing, the U. S. Supreme Court completely backed off the determination it made originally. The language has been loosely used in a few cases since then, but it is clear that municipalities do not rent their streets.

 

The franchise fees are, in essence, a tax. There are technical questions that come up in the judicial context of what is a tax and what is a fee and there are various ways in which that issue arises and reasons for it to arise. But the fee we are talking about, paid by the cable companies, is paid to the government and is in almost every way identical to a tax. It goes into the general fund, it is used to meet the general expenses of the municipality, and it is really indistinguishable in all critical ingredients from any other kind of tax.

 

We are supporting this legislation today to equalize the burden on the customer and to level the playing field. This 5 percent fee cable pays to municipalities is a separate line item on the bill. It is specified as for this governmental purpose and it is one of the reasons why DBS service is able to undercut the price of cable service. As a result, nationwide DBS is growing much faster than cable. Direct-broadcast satellite has a 20 percent share of the market now and is increasing dramatically every year.

 

The bottom line is cable has to pay this 5 percent amount of its gross revenues to the government and we believe DBS should also be required to make a similar payment. Under the Telecommunications Act of 1996, municipalities are not permitted to tax DBS, but the legislation specifically provides for such taxes to be imposed at the State level.

 

Mr. Schorr:

The satellite companies will also tell you a tax on DBS customers will harm the rural areas. It is clear by their own statistics the vast majority of their customers are not in rural areas. They are in metropolitan areas where they compete head to head with the cable television providers.

 

Senator Rhoads:

How long have Florida and North Carolina had this on the books and is theirs a 5 percent tax too?

 

Mr. Gillespie:

The taxes have been on the books for more than a year. In North Carolina it is a 5 percent tax and in Florida it is a 4.5 percent differential tax.

 

Senator Rhoads:

That is on the monthly fee they charge to the consumer?

 

Mr. Gillespie:

That is correct.

 

Senator Rhoads:

Has either state been challenged yet in court?

 

Mr. Gillispie:

No.

Senator Tiffany:

If this passed with the 5 percent tax, what would the average satellite television subscriber pay in taxes?

 

Mr. Schorr:

It would be the same exact basis and fees paid by the cable television customers so it would be 5 percent of the gross revenues. If the monthly bill was $40, the tax would be $2.

 

Senator Tiffany:

Is there any other line item of taxes right now either the cable subscribers or the satellite subscribers would pay?

 

Mr. Schorr:

There is currently one other fee cable television customers pay which is a fee set forth by the federal government and the Federal Communications Commission (FCC) and it specifically goes to the FCC.

 

Senator Tiffany:

The satellite does not pay that fee? There is an FCC tax on my cable bill. If I had satellite, would there be the same FCC tax?

 

Mr. Gillespie:

They pay no such taxes and they have no such line items on their bills.

 

Robert Gastonguay, Lobbyist, Nevada State Cable Telecommunications Association:

I am here in support of S.B. 492. When this first came about I did a poll of some of the cable operators around the State. I learned 12 percent of their base subscribers have gone over to satellite. Therefore, they have lost 12 percent of their subscriber base. Charter Communications is estimating that loss at 20 percent of their Reno-Sparks area and says it is a lot higher in the rural areas. Although they do not know the exact figure, they estimate somewhere between 40 and 50 percent.

 

Mr. Schorr:

I want to remind the committee when those customers leave the cable company, not only does the cable company lose revenue necessarily, but so do the local communities through lost franchise fees no longer going to the local communities. It remains back in the pockets of the DBS providers and never comes back to the State. They have no employees generally within the State. They provide very little of anything to the local governments and communities.

 

Senator Neal:

Is there a problem with the First or Fourteenth Amendments as they relate to this situation?

 

Mr. Gillespie:

No, that is addressed in the memorandum (Exhibit P). As long as this tax has a reasonable basis, and it obviously would in this case because the effort is to equalize, there would be no problem.

 

Senator Neal:

Are we talking about a signal emanating from a satellite and de-scrambled somehow to make a picture in someone’s home?

 

Mr. Gillespie:

Yes, that is correct.

 

Senator Neal:

If we are talking about a signal, would we be taxing the signal, or the de‑scrambler?

 

Mr. Gillespie:

We would be taxing the revenue generated through the service and although the service comes from out of State, it is sold by independent contractors within the State.

 

Senator Neal:

What is the service?

 

Mr. Gillespie:

The service is the providing of video programming to the consumer.

 

Senator Neal:

Through a signal?

Mr. Gillespie:

Yes, in much the same way as the cable operator provides a signal. In each case, the signal begins in someplace like Atlanta and is transported by satellite to the head end of the cable operator and is distributed.

 

Senator Neal:

Do you have a cell phone and do you pay a tax on it?

 

Mr. Gillespie:

Yes, I do.

 

Senator Neal:

Where do you pay the tax?

 

Mr. Gillespie:

I pay it on my bill.

 

Senator Neal:

The point I am trying to make is someone decided land cable was not the best way to go and so decided to go with the satellite. You are proposing they pay a tax based on what?

 

Mr. Schorr:

Based on the same programming revenues on which we pay taxes. It is not the delivery of the service on which they are being taxed. It is the programming services received by the individual customer, which is exactly the same as the programming services received by customers of cable television.

 

Senator Neal:

I understand the courts have not ruled this as an area that could be taxed.

 

Mr. Schorr:

Again, it has been taxed in two states, Florida and North Carolina for more than a year and has not been challenged in the courts at all.

 

Mr. Gillespie:

In addition, the purpose of the memorandums I provided to the committee (Exhibit P and Exhibit Q) is to demonstrate that the issues with regard to the constitutionality of this tax have been resolved in similar context by the United States Supreme Court. I submit, if the national DBS companies really felt a tax such as this were unconstitutional, they would have challenged the taxes imposed by those other states.

 

Senator Neal:

Would you share with the committee your conclusion in your law review article?

 

Mr. Gillespie:

Municipalities have been trying to pluck what I call the golden goose of the new electronic age. At the end of the nineteenth century it was telephone and telegraph and now it is cable and high-speed access. It is my conclusion the days when municipalities will be able to pluck that golden goose are drawing to a close.

 

Senator Neal:

Meaning what?

 

Mr. Gillespie:

Meaning the municipalities are not going to be able to extend these fees to things like high-speed access.

 

Senator Townsend:

I would like to clear up a couple of things. First, to Senator Neal, all cell phone users in Clark County are taxed at 75 cents per month, per unit. The collective franchise fees paid to Clark County last year by all utilities were $80 million. The federal government prevented local government from taxing satellite and so it is left to the State. It is quite clear it is a fairness and equitability issue. If you want to repeal all of the franchise fees, I would certainly be glad to entertain the idea. However, I am sure Clark County might be up here testifying since we heard from them last Monday night about their substantial problems financially. I would think this is a far more fair and equitable way to go.

 

Senator McGinness:

You have in your folders a copy of an e-mail sent to me by Guy S. Hobbs, Chairman, Governor’s Task Force on Tax Policy in Nevada (Exhibit S), regarding this issue. He talks about the task force’s consideration of this tax.

 

Fred L. Hillerby, Lobbyist, DIRECTV:

I will turn the testimony over to Mr. Palkovic.

Michael W. Palkovic, Senior Vice President/Chief Financial Officer, DIRECTV:

I would like to cover a couple of the more important issues being debated here. First I would like to talk about the issue of cable franchise fees being a franchise fee versus a tax. Our position is franchise fees are simply not a tax but rather a cost of doing business. I want to read you a typical cable franchise agreement (Exhibit T). Under “Franchise Fee,” it says, “as compensation for use of the public rights-of-way, the Company shall pay to the franchising authority a franchise fee.” It is very simple and very straightforward. This just happens to be the City of Las Vegas franchise fee agreement signed in 1998 by Cox Cable agreeing to that language. There are undoubtedly thousands of these around the country written very much the same way.

 

To give you a little background on myself, I spent 14 years in the cable industry and out of those, I worked a year and a half for Cox Communications. I know a lot of people and have a lot of good friends there and I believe Cox to be a good operator. However, I believe they are presenting this issue incorrectly. Simply put, you cannot even begin the process of building a cable infrastructure unless you have permission and rights to use the public rights-of-way. You have to dig up streets, repair the streets, maintain the plant, and upgrade the plant. All of the things they have to do to operate their business require access to a local infrastructure.

 

The DBS business requires no access and does not infringe at all on any local infrastructure. We do invest in infrastructure, significantly. I wanted to talk a little bit about how we see this cost as the beginning part of the process of the cable operators being able to even build their infrastructure. Clearly, they need to have a franchise agreement. While the franchise agreement is not stated to be exclusive, it is de facto exclusive. You can count on one hand the number of cable over-builders existing in the country today.

 

When you sign up to the terms and conditions in the franchise agreement, including the fee, you have the right to operate cable for 10, 15, even 20 years, depending on how many automatic renewals there are. So it is effectively an entitlement to operate cable in those communities. It is not like they are not getting something for the fee. They are getting a right to operate, build their plant, receive signals from satellites for which they do not pay, and then transmit those signals to the customer. That is how they generate their revenues.

 

Senator Neal:

Just for clarification, you said Cox receives a signal from the satellite?

 

Mr. Palkovic:

Cable systems operate by receiving signals from a satellite into their facility and ship it over their cable wire into the home and into the back of the television set. Between our competitor EchoStar and ourselves, we have spent close to $1.5 billion to get access to Spectrum. We then proceed to build satellites. DIRECTV has built eight satellites and EchoStar has built a similar number. My point is, we make significant investments in order to get the signal, uplink the signal, and downlink it into the customers’ home. We do not infringe on the infrastructure of the community at all. Further, we actually subsidize the equipment to the customer generating local sales taxes for the community.

 

We have our infrastructure and they have theirs. There are pros and cons between both of them but cable franchise fees have been a fundamental part of the cable cost structure for the last 20 or 30 years. It did not just show up in the last year when there was a tax issue and a tax revenue challenge at the State level. I wanted to at least give our position on how we look at this being a cost of them operating their business and it has been there for a significant number of years.

 

The next issue I want to talk about is competition. I happen to agree that DBS companies have provided bona fide competition for the cable industry. That is the whole point, not to have a single source for multi-pay video product. We compete on a number of levels with the cable industry, not simply price. If this were just about a 5 percent price differential, you would have to ask yourself why, since 1996 according to Consumer Reports, has the cable industry raised its rates 45 percent while the DBS providers have raised theirs 5 percent. Inflation was 16 percent. It is a choice you make on whether you want to satisfy customers and take less profit, or whether you want to continue to maintain the profit you were used to before competition and continue to raise prices beyond anybody’s measure of what is reasonable.

 

Mr. Palkovic:

My point is competition is real, which is the reason the DBS business is in place. I think it is important to note competition is in all parts of the State of Nevada. We have a fully competitive offering against cable in the Las Vegas Direct Marketing Association (DMA), which is a television market, in the Reno and Carson City DMA and even in the northern parts of the State covered by the Salt Lake City DMA. Anything a customer can get through the cable operator other than the government channels originating in the community, he can get anywhere in the State, including any rural area and in some cases, even where cable is not available. About 17 percent of customers in the State do not even have cable available to them. That does not speak to the number of people who have cable available but which has not been upgraded to keep pace with the way technologies have evolved.

 

Certainly, Cox is an example. It is a good operator and spends a lot of money, but clearly, they are not any happier about losing customers than the rest of the cable industry. It is no surprise in 2002 the cable industry lost customers for the first time in the industry. Call it a wakeup call, but it is all about competition. In our view, competition is more than just how much you charge for the product. DIRECTV won two customer service awards in 2002, one from the University of Michigan Business School and a second one from J. D. Power and Associates. We are extremely proud of those. While some may be better than others, we compete on all fronts giving customers good service and a good-value proposition. That is not something I think should be a negative towards the DBS industry but rather we should be applauded.

 

Finally, I want the committee to know we want no part of any role in solving the tax issues of the State. Any tax singling out satellite clearly gives cable an unfair competitive position. It is actually going to accomplish exactly what our friends in the cable industry have said they want to solve. It is going to give us a tax not applied to cable. When cable pays the fees they are talking about, those fees stay in the local community. They do not help this committee with their State tax issues at all. If a tax is determined to be necessary and it is part of the end game of what the committee is trying to accomplish, DIRECTV would be willing to support a broad-based tax. For example, add our 120,000 customers, and cables 420,000 together, lower the tax so it is not as punitive to the consumer, and basically broaden the tax base. Make it less vulnerable to one single provider that is actually 20 percent of the video business. Tax any customer regardless of what video operator they choose.

 

That is our feeling and it is equitable. I believe it hits a lot of guiding principles set forth by the task force on tax policy and presumably embraced by the committee. That is to be as broad-based as possible and provide a reliable revenue stream while being the least punitive on the consumer. We would gladly come to the table and help resolve the problem. We are not here raising our hands saying “Please tax me,” but if you have a problem, we certainly will play our part and come to the table. We just do not want to be at the table all by ourselves. I have furnished the committee with an overview of my testimony (Exhibit U).

 

James T. Endres, Lobbyist, EchoStar, and McDonald Carano Wilson Limited Liability Partnership:

I will turn the testimony over to Ms. Frank.

 

Karen Frank, EchoStar:

I want to reiterate some of the things Mr. Palkovic said earlier. First of all I want to say EchoStar is committed to the State of Nevada. We have over 100 independent retailers selling our equipment on which they do collect sales taxes. We also pay sales taxes to the State through our leasing program because we do own some equipment in the State. We have never claimed we do not have a nexus here.

 

Another thing I want to mention is the DISH Network also provides signals to the three DMAs in the State of Nevada. We have local network signals to Las Vegas, Reno, Carson City, and also Salt Lake City, Utah. Finally, EchoStar is incorporated in Nevada.

 

I agree with Mr. Palkovic regarding franchise fees not being a tax. Franchise fees are really payments for public access. They are a cost of doing business just like any other. Just because the cable companies choose to say franchise fees are a tax does not necessarily mean they are.

 

We have eight satellites, soon to be nine. It costs $200 million to launch a satellite. This is just part of our cost structure and gives us our rights-of-way. It is paid to the federal government instead of the State. It is just a cost of doing business. Franchise fees are just the cost of doing business also just like salaries and any other types of fees.

 

Finally, this tax will fall more heavily on rural customers because cable is not necessarily available in the rural areas. If there needs to be an increase in revenues, it should be spread across both types of services.

Senator Neal:

Who has the radio satellite?

 

Mr. Palkovic:

That would be XM Satellite Radio and SIRIUS.

 

Senator Neal:

When we talk about satellite versus cable systems, are we looking at something tantamount to charging a commercial airline for the use of our highways?

 

Mr. Palkovic:

If you are referring to taxing satellite to try to level the playing field for what the cable industry pays for using the rights-of-way, that would be a good analogy.

 

Senator Neal:

Are you in the Las Vegas area?

 

Mr. Palkovic:

We broadcast all of our services nationally and we also uplink and downlink into the Las Vegas DMA which is significantly around the Las Vegas area.

 

Senator Neal:

How manly channels do you downlink in the Las Vegas area?

 

Mr. Palkovic:

We would downlink roughly 250 to 275 depending on how you count the local channels.

 

Senator Neal:

How do you price your services to the customer?

 

Mr. Palkovic:

We price very similar to the cable industry. There is a price for a basic package costing anywhere from the mid $20s to the mid to high $30s depending on how many channels you get. You would then pay an additional fee for any premium services you might wish to add such as HBO, Showtime, or Starz. There are a number of other transactional things you can buy, like Pay-Per-View events or movies. It is very similar to cable.

 

Senator Neal:

How do your prices compare to cable?

 

Mr. Palkovic:

In some cases we may be a little higher on the low end because we do not have a package you would call “life-line cable” offered by some cable operators. We price a little bit lower and in some cases, a lot lower for a fully digital package. This is primarily because of what customers in the cable industry have to pay to rent a digital box in order to get into a digital package. So we are kind of right in the middle. If you want the same number of channels in digital, you actually get it for a significant price reduction.

 

Ms. Frank:

EchoStar, the DISH Network, prides itself on being the lowest-cost provider of television services.

 

Senator Neal:

What we are doing here will eventually affect the public. Whatever we do here, if we happen to pass this, the cost is not going to stay with you. You are going to pass it on down to the public. I want to be able to tell my constituents when I go home I voted for this, or I did not vote for this, and the reason for my vote. I just want to make sure I understand what we are dealing with here in looking at these particular costs. Are you affected by the weather in terms of your signals?

 

Mr. Palkovic:

Not typically. It has to be a fairly significant rainstorm to have what we call rain fade, but it is usually allowed for in terms of how the signal is compressed. It is very rare for weather to have any impact. In the areas where it snows, an exceptionally heavy snowfall can cover the dish but it is not normal.

 

Senator Neal:

I had a great appreciation for satellite operations when I discovered a couple of months ago that one of the drones they were flying over Iraq was being directed by satellite from Nellis Air Force Base. It gave me pause because I was only about 18 miles from the area. I was kind of concerned about that particular operation and the extent to which the development of that system has gone. I find it quite amazing when you can sit in a bunker at Nellis Air Force Base and direct a drone plane across the country of Iraq.

 

Senator Townsend:

Senator Neal is absolutely correct. When we go home, no matter how we vote, we have to explain this and its effect. You have made reference to the 5 percent franchise fee being a right-of-way fee. In other jurisdictions and experience, did the city or county in which a franchise fee was imposed also charge an additional fee any time a company had to dig up the pavement, access, or other things in order to go into the ground to lay something?

 

Mr. Palkovic:

If I think back long enough to when a cable plant was strong on poles, there were pole attachment fees and other things utility companies would charge the cable operator. It has been a long time since cable was delivered that way. Most upgraded plans are in the ground. Typically, I think the cost is borne by the cable operator to dig it up, repair it, upgrade it, et cetera. I do not know if there are any fees per se.

 

Senator Townsend:

So, the franchise fee, which is a right-of-way fee, only grants a right-of-way, and there are still costs borne by the cable company which has to get in the ground to lay new cable. In the jurisdictions in which you both operate, particularly here in Nevada, what are your property tax issues? Where do you pay property tax?

 

Ms. Frank:

We have a rental program at DISH Network where you can rent your satellite dish for a nominal fee per month and then we, in essence, have ownership of those so we do pay property taxes on those set-top boxes in the consumers’ homes.

 

Senator Townsend:

How do you pay property tax on something that is not a property?

 

Ms. Frank:

We pay tangible personal property taxes.

 

Senator Townsend:

What about a real property tax?

 

Ms. Frank:

We are not using the infrastructure of the State at all and therefore have no land or buildings here.

 

Senator Townsend:

What about employees? Do you pay a business activity tax? How many employees do you have here?

 

Mr. Palkovic:

Speaking for DIRECTV, I do not believe we have any employees per se in the State of Nevada. There are third-party contractors operating as well as retailers, but it is an arm’s-length type of relationship.

 

Ms. Frank:

Speaking for EchoStar DISH Network, we do have some satellite offices here in the State but I do not know the number of employees.

 

Senator Townsend:

How long have you both been doing business in either one or both ends of the State?

 

Mr. Palkovic:

DIRECTV has been in business since June 1994 nationally. I believe we just started providing the local channels over the last year.

 

Ms. Frank:

EchoStar has been in business since March 1996 nationwide and then last year we offered local channels in the Nevada area.

 

Senator Townsend:

No one believes in the competitive world more than I do and it is great our constituents have access to all kinds of technology and all kinds of competitive services. I think it makes all of the providers better when someone is down the street competing. You are competing on price and service and the older I get, I am more impressed by service than I am on almost anything else. It is not just about a fairness issue but it is about as a consumer, what I am looking at on my bill. As a State we have chosen to break out almost everything in utility bills. Then it becomes an issue of equity. It is not about getting more money for the State. We are all going to be thrilled to have any kind of dollars no matter who is going to participate, but it is a matter of equity.

 

As I stated before, the issue is a very simple one. Somebody came up with an idea and they entered a market that had been going along as a fixed cable system for a long time. You probably understand this better than anyone Mr. Palkovic because you were in that business. It would be as if somebody came up with a new car and they entered the market 10 years ago and then went from zero to the No. 1 selling luxury car in this country. How many more cars could they have sold if there were no sales tax on those cars, but there were sales tax on every other car?

 

So, I think it is just a fairness issue. I do not disagree with anything you have said, but I do disagree with the fact we are arguing over some fine issues that might be important for a law school or for people with degrees in tax, but for the consumer, we have two choices. One of them is to repeal all franchise fees and the other is to make all utilities the same. I am looking for the kind of commitment your companies have made to this State, not just to the consumers.

 

Senator Coffin:

Was it put in the record how much the direct-broadcast companies put into the State of Nevada, or pay the state or municipalities, if anything? I understand the dispute between rent and tax but I was just curious if we have a record of any kind of maintenance, sub-service, or just maintenance of the community.

 

Mr. Palkovic:

No, we did not offer a number. I know we generate by virtue of selling equipment through local retailers and employing contractors in the State. We not only employ people indirectly, but we generate sales tax. I do not have a number to offer you today on behalf of DIRECTV.

 

Ms. Frank:

We do collect sales taxes of approximately $15,000 per month and remit it to the State.

 

Senator Coffin:

I do not know if that is enough to establish nexus or not. Do you both have nexus here?

Ms. Frank:

We think we have nexus through use of retailers. The only thing I am thinking constitutionally is it seems discriminatory on the face of it that you would tax one type of video service at the State level and not tax another.

 

Senator Coffin:

I know you can buy these dishes outright, and in some cases you can get them on installment or you can buy them from the company. Does the company own the dish in those cases?

 

Ms. Frank:

EchoStar has two models. You can buy a dish from your local retailer or you can buy it direct and we will collect the sales tax. Or you can lease a satellite dish for a nominal fee, and we do collect sales tax on that leasing stream and remit it to the State of Nevada.

 

Mr. Palkovic:

DIRECTV offers a lease model. The reaction of consumers has been very low primarily because you can get two receivers and a dish for free today pretty much with any retailer. The marketplace has driven the competitive environment in such a way it is very attractive for people to own the equipment outright simply in exchange for an annual commitment to your service. The market has evolved this way over the last couple of years so the lease model is really not as compelling.

 

Senator Coffin:

Do you have boosters in some of these cities? I have satellite radio I carry around and enjoy. The point is that XM has boosters in a lot of urban areas so the satellite signal is not blocked.

 

Mr. Palkovic:

As far as I can tell, we do not need them. The satellite signal comes from the satellite directly to the home and does not require any boosters if I understand what a booster is. Are you referring to an amplifier?

 

Senator Coffin:

I am talking about a repeater or something to help a home owner get a signal they cannot get because of a tall building, or perhaps geography.

 

Ms. Frank:

It is not needed because the satellite dish is fixed on your house to a southern exposure. With a satellite radio, you are driving so you cannot have a fixed point in the sky looking at the satellite. The only thing we do have is equipment to get local channels we can uplink to our satellite. We also have some equipment in the State where we can test the satellite strength at our uplink center and make adjustments to make sure it is sufficient.

 

Senator O’Connell:

Just to clarify, would you go back over the $1.5 billion investment you mentioned earlier?

 

Mr. Palkovic:

I was referring to combined investments companies have made in Spectrum to get access and rights to operate at those orbital locations by the FCC. If you go back in time before the industry launched, there were no significant fees charged for those orbital slots. They became valuable as people realized they actually could build a business on them and they began to put those orbital slots up for auction. For example, there are three continental United States slots, each having 32 frequencies and a look angle to see the entire country. Those are arguably the most valuable of all the FCC locations. EchoStar and DIRECTV share those. We operate at 46 out of the 96 and EchoStar operates at 50. We acquired approximately 16 of those slots through acquisitions of other businesses once the auction process had started and they had taken on value.

 

Senator O’Connell:

You mentioned you had eight satellites at a cost of $200 million each. Are those eight satellites invested in the State?

 

Ms. Frank:

No, they are not in the State. They are 22,000 miles above the equator.

 

Mr. Palkovic:

I would like to respond to the issue of North Carolina and Florida. There are 20 other states having some form of sales tax applied on an equitable, fair basis between the cable industry and satellite. I think it is important to note this debate is ongoing in another five, six, or seven states and the same arguments are being made by the cable and satellite industries. Twenty states have seen
the side of the argument proposing to make any tax broader, make it equitable, make it fair, and not try to give the cable industry credit for franchise fees that stay locally.

 

We have engaged law firms in Washington, D. C., and they have been looking at this. Both North Carolina and Florida are under review by those law firms. Our company will look at the analysis and decide what to do with it in terms of pursuing any legal remedies. This very conversation came up in the state of Connecticut as they were evaluating their tax and budget issues. This thing could potentially be challenged in court, which was clearly a concern for their committee. The fact it has not yet gone to court does not mean it is not out there, because the law firm we have engaged is in the process of reviewing the constitutionality of this issue. I am not here to debate the legal aspects but I want to be clear most states have not gone down this path.

 

Mr. Blinn:

The satellite companies have said they are ready to be taxed and I think they ought to pay the 5 percent just like everybody else. It would mean 5 percent in the coffers of education.

 

Mr. Chinnock:

I just want to make a comment regarding our fiscal note. We are comfortable with the revenue estimates we made. I think we were a little aggressive on the expense amounts because we looked initially at putting this in our compliance section involving revenue officers and auditors. However, this really belongs in our centrally assessed area and we believe we could handle it with just one utility analyst. Therefore, as far as the expense costs, it would be approximately one-fourth of what we had estimated.

 

Chairman McGinness:

We will close the hearing on S.B. 492 and briefly reopen the hearing on S.B. 471.

 

SENATE BILL 471: Revises provisions relating to certain taxes and fees regarding petroleum products and fuels for motor vehicles and aircraft. (BDR 32-584)

K. Neena Laxalt, Lobbyist, Nevada Propane Dealers Association:

For the record, I just want to let you know S.B. 471 was a consensus bill worked out between DMV and our industry. We agreed to every word. The suggested amendment by Mr. Krueger was not passed by my industry and I found out about it only halfway through this hearing. The first parts of the amendment are fairly friendly. However, the very last line deals with the conversion formula, which has been a highly controversial issue for the last several sessions. It essentially impacts only my industry and actually, only one of my members.

 

Ms. Winchell:

In my earlier testimony, I said the DMV would support the amendment proposed by Mr. Krueger. What we do support are the changes to the trust account, however, we cannot support the changes to the propane industry. It would have a severe impact on them.

 

Mr. Krueger:

Just so there is no question, I did not ask Ms. Winchell nor did she agree with me to support the bill. This came along well after 1 p.m. today and I did make an unsuccessful attempt to find Ms. Laxalt. It is simply a policy decision for this committee. Do we want to leave $660,000 of road fund money off the table when we are in fact allowing one taxpayer to pay 6 cents a gallon for propane while everyone else is paying 21 cents? It is your decision and it is just an equity issue on my part.

 

Chairman McGinness:

Mr. Krueger, did you work on the bill with DMV, Mr. Cappuro, and Ms. Laxalt?

 

Mr. Krueger:

Absolutely not.

 

Bill Gregory, Lobbyist, Yellow-Checker-Star Cab Company:

Our company is the company in question here and the one being targeted. This issue has come up in many sessions now and I think if this committee would like to discuss this as a policy issue, it really should not be done in this fashion. You should really have a hearing on it.

 

Yellow-Checker-Star Transportation, the parent company, has invested $5 million to $6 million in a plant to be able to run their cars on petroleum and propane. They spend $1500 per conversion and have over 500 cabs running on propane. The result is a savings of 800 to 1000 tons of particulate in Clark County.

 

There is a lot of history here. When our company originally made the conversion to propane, it was done at the request of local government. If they were to be a good corporate citizen, they would convert to this fuel and try to help with the air quality issue since they had so many vehicles on the road. Therefore, the result of Mr. Krueger’s proposal would about triple the amount our company would pay in gas tax and would most likely result in them no longer utilizing this fuel. There would be no benefit to give them the incentive to spend the money needed to do so.

 

So, again, if you wish to discuss this as a policy issue we would appreciate a full hearing in order to get more of a chance to discuss what we believe would be our position on the bill.

 

Chairman McGinness:

We will close the hearing on S.B. 471 and take a short recess. It is now 5:55 p.m. and we will reconvene here at 6:30 p.m.

 

Chairman McGinness:

We will call this meeting back to order at 6:37 p.m., and open the hearing on S.B. 382.

 

SENATE BILL 382: Makes various changes to provisions governing public financial administration. (BDR 32-721)

 

Senator Terry John Care, Clark County Senatorial District No. 7:

I would like to tell the committee how we got here, why we have done what we have done, and how we went about doing it.

 

Everyone on this committee was part of the 71st Legislative Session and I think we would all agree that when we left the building after adjournment, we all knew when we came back we were going to have to do something. I think you will all recall the last hours when we passed out S.B. No. 577 of the 71st Session, the bill which among other things, had the increased filing fees with the secretary of State and A.B. No. 460 of the 71st Session, which changed the tax on rental cars.

 

We also had Assembly Concurrent Resolution (A.C.R.) No. 1 of the 17th Special Session and Senator Amodei and I would like to commend its members. I do not think they had anything to gain from what they did except probably a lot of headaches. We also felt it was the duty of the Legislature to review and ponder the recommendations coming from the Governor’s Task Force on Tax Policy in Nevada, not to necessarily adopt those recommendations, but to study them. If we then thought those were the right things to do, we would go ahead and come up with some additional proposals.

 

I think we probably met and discussed this for the first time last spring when several things were going on. First, the number for the projected biennium deficit was getting larger. I think I recall when we left here, it was somewhere around $100 million, maybe $120 million. It then gained $300 million, $400 million, $600 million and on up. Also at that time, it appeared to us as though the task force was inclined to go toward a gross receipts tax (GRT). Our philosophy was if you felt the GRT was not acceptable, but you agreed additional revenues were necessary, then the obvious course was to come up with an alternative.

 

Senator Care:

We do not want to get into a debate this evening about the GRT, as I am sure you have had debate at other hearings. At any rate, we were both opposed to it and so we came up with S.B. 382. We met several times, there were several telephone conversations, and we used several resources available to everybody. We used not only the United States Bureau of Labor Statistics and the United States Bureau of the Census, but data compiled right here in Nevada by the government itself. We listened to anybody who approached us. We thought we had an obligation to look at the past materials so we did.

 

We want to emphasize this is our product. We are not saying it is the greatest product, but we want it understood, it is our product even though you may have heard rumors to the contrary. Nobody told us we had to put this or that in the bill, but ultimately we did agree to some suggestions. We were looking for several things. We wanted something consistent with the spirit of A.C.R. No. 1 of the 17th Special Session, meaning additional sources of revenues, broad-based. We did want to focus on business. We are sensitive to the issue of business not paying enough in this State.

 

We obviously wanted something nonpartisan, republican and democrat, one from the north and one from the south. We were mindful, of course, that anything coming out of the Legislature would require a two-thirds vote in both Houses. We wanted something not only fair but also we wanted to kind of spread it around. We did not want to come back here next session and fool with this again. We wanted to fix this in this session and not have to worry about additional increases and new taxes in subsequent sessions. Again, we viewed this as an alternative. We did not want to come up here in the session and just have to vote yes or no on the GRT. We consider this workable.

 

We are not tax experts, but we have something here with enough components that amendments are certainly going to be agreeable. I would even go so far as to say amendments are going to be absolutely natural. We expect them and probably expect a lot of them. We know we are going to have our critics too, which is fine because it is all part of the public discourse we hoped would be generated with this bill. We had five drafts and we now appreciate the difficulties in drafting a tax bill. We would send those off to the Legislative Counsel Bureau and when they came back we sometimes did not recognize certain sections. Our hats off to those people who deal with this on a much more frequent basis than we do.

 

We recognize there are other possibilities which the task force recognized as well. Another point we want to emphasize is we are not going to come before you tonight and say this is how much additional revenues we need to generate. We are willing to start with the $700 million I think the task force indicated we would need if we are going to stay even with spending on current services. Beyond that, it becomes a part of the legislative process. We both believe a budget ultimately is really kind of a reflection of what a State thinks the Legislature or the government is supposed to do for its citizens.

 

For me, the primary interest is additional funding for public education and I have said so from the very first. I have sat in on special education classes where you have 17 special education children and one teacher. It is impossible to keep track of those 17 children, even if you have more than one assistant. I understand no tax is fair. Everybody is going to find something about a tax that is not fair. That is just a given and eventually you get into a discussion about who is going to pay. Ultimately, we pay. I am convinced of that. I will now turn this over to Senator Amodei for his comments and then I will go over the bill.

Senator Mark E. Amodei, Capital Senatorial District:

We look at the history of this in modern times and about every 10 years or so, we are faced with major decisions regarding revenues in this State. Many of you served in 1981 when we looked at the property tax shift legislation. I think all of you served in 1991 when we dealt with the business activity tax and some things with respect to mining. Here we are 12 years down the road and we are looking at major revenue issues again. So the question before us, I think collectively as a Legislature, is what is your view for our State for the next 10, 12, however many years in terms of revenue? Can we and should we do better as we evolve from a State of between 1 million and 2 million to one headed for 2.5 million in pretty short order?

 

The premise of what you have before you in S.B. 382 is fairly straightforward and simple. We do not know what the number is in terms of additional revenues. I do not think that is a landmark statement as we sit here today with 57, 58 days left in the session, so we would not presume to tell you we need to do every one of the things contained in S.B. 382. That is still part of the ongoing process, but it is why you will see things later in the bill talking about budget reforms, expenditure reforms, and passive revenue generators.

 

As we have evolved from a State of between 1 million and 2 million people to one heading to 2.5 million people in pretty short order, I would suggest we take a look at how we do business as a State and how we generate information on how we do business as a State. We need to evolve from a tiny State to an efficient small State. We think S.B. 382 provides a framework having a potential to raise significant amounts of money. We think it is possible to do so without destroying our reputation as a great place to be in business, a great place to live, a great place to have your kids go to school, and a great place to retire.

 

So, all of this cliché you have heard so far, “If you do this, this part of the world is going to fall off, or if you do that, that building is going to fall down,” it is neither here nor there for the decisions we have to make. When I say “we,” remember it is the Legislature that has passed every tax bill in the history of this State.

 

We focused on trying to make this as straightforward as possible and provide a workable framework. We focused on transaction-based, pay-as-you-go ideas. We tried to use to the largest extent possible, existing infrastructure. I am sure you will hear plenty of testimony today, tonight, and into the future about problems with how the bill is structured. The Department of Taxation did an analysis of this (Exhibit V. Original is on file in the Research Library.) and I was looking at their estimate of total department cost and the potential yield. Under the business license fee analysis on page 4, it shows it will cost about $6 million to bring in $7 million. Well you know what? If that is a fact, I would not give it a lot more consideration. I do not think anybody ought to spend $6 million to net $1 million.

 

Senator Amodei:

I know there will be some testimony on the payroll surcharge in respect to having the tax department administer it instead of employment security. That is something I think we ought to look at with an open mind. We wanted to avoid sticker shock. We used phasing where it was possible in many of these areas. We did not want to go to any one group and have them wake up one day and say, “Guess what, you are now in the spotlight for the revenue issues of the 2003 Legislative Session of the Nevada Legislature.” This State is inclusive. It is a State composed of a lot of different businesses, a lot of different individuals, and a lot of people with different interests. I would argue to concentrate on any one area or group is not appropriate. So, we tried to avoid sticker shock.

 

We have tried to reduce the reliance on gaming. Under the heading of “No good deed goes unpunished,” I am sure you will hear from some of those folks later on about what a nasty idea this whole thing is, but we agreed we did not want to rely upon the gaming industry as a major source of new income for this State. When things happen that impact the gaming industry, we do not want to be vulnerable in an economic sense. We also wanted to exploit reasonable opportunities for exportability, which is why we took a look at the work the task force did on the entertainment tax. We had some sticker shock considerations so we built some things into there which is why you see a room tax included there and which we will talk a little bit about later. With that, I will turn it over to Senator Care to start going through the various portions of the bill and then follow it up with a couple of sections and then make some closing comments.

Senator Care:

I will be referencing these two documents as we go along (Exhibit V and Exhibit W) We are going to be looking at how much this will generate, something on which the experts do not even agree because it is complex. This is not an easy exercise.

 

The first part of the bill, sections 2 through 28, is shown on the first page of the section-by-section summary of S.B. 382 (Exhibit W). The amusement tax is not a new idea. It has been knocked around in this building for some years. I know the Nevada Taxpayers Association had some discussion on it in 1991. The Governor and task force both have proposed an amusement tax of 7.3 percent and 6.5 percent, respectively, on nonparticipatory activities. We think an admissions tax does conform to the charge of A.C.R. No. 1 of the 17th Special Session. The admissions charge, or some form of it, exists in about 37 states and in many of those it is a component of the sales tax. In Connecticut the tax is 8 percent to attend a movie. In New Jersey it is 9 percent, but 3 percent is for the admission itself and 6 percent is part of the sales tax.

 

There is a definition in section 3 of the admission charge and you will notice in section 5 there is a definition of entertainment. The language there is “participants and spectators” because what we are doing here is saying, “Yes, you have to include the golfers,” not just the moviegoers and the bowlers, but the golfers as well. In section 11, you will see our proposed rate is 3 percent as opposed to the 7.3 percent or 6.5 percent. In addition, we decided to exempt the first $10, which would probably take care of most of your moviegoers, but not your NASCAR race fans, et cetera. Also, it is intended to be read “per ticket, per event.” In other words, if a family of four goes to a movie and three wait while dad is in the line to buy the four tickets, if the total cost is $25, there is no tax on the $25. You are still looking at the per ticket price of $6.25.

 

Section 13 indicates the tax is remitted monthly. The collection allowance is outlined in section 14. In section 28, you will see this is not to be touched by the Legislature for 10 years. Now who is kidding whom here? We know, assuming this passes, the Legislature in the next session can come back and change this but we are trying to make a statement here that if we are going to do this, we just want to do it now and get it over with.

On page 1 (Exhibit V), The Department of Taxation shows a yield of $27 million to $29 million in total additional revenue per fiscal year. It also talks about the necessary lead time, the resources needed, and that sort of thing. However, if you look at the second calculation, done by the Legislative Counsel Bureau (Exhibit X), it shows the admissions tax at a little more than $16 million in fiscal year (FY) 2003-2004. It shows $33.76 million in FY 2004-2005, so there is a discrepancy there. It makes us appreciate just how difficult it is to project what we would reap from any of these levies. Another point I want to make is it would not apply to the casino entertainment tax and the boxing and wrestling fees already in existence in NRS 463 and NRS 467. We did not want to touch those.

 

The transaction tax on services is in sections 29 through 78. This also is not a new idea. It was considered by a Legislative Commission subcommittee study in the interim of 1990. The task force even makes reference to it in section 8 of its report. It points out that a substantial amount of analytical work was done in support of this concept. We think it conforms to the charge of A.C.R. No. 1 of the 17th Special Session to expand the base. I think it also recognizes the expanding role of services in our economy. Increasingly our economy is very much becoming primarily service-oriented.

 

The definitions in those sections are very tricky. I never realized how tricky definitions could be, but for example, look at section 32, “business or profession.” I know what that means to me. Section 37 shows the definition of “service” and I know what that means to me. Then you look at section 38, subsection 2 and it defines “personal service.” Defining the difference between a “personal service” and “service” requires some pretty nifty word crafting. To us, a “personal service” would be something like beauty shops, barbers, photographers’ studios, and laundry services, basically nonbusiness services. It would not include repair services. However, we agree these definitions probably are going to need some work.

 

We did look at other jurisdictions and we came up with a rate of 3 percent. If you look at section 38, subsection 1, paragraphs (a) and (b), there is a $50 exemption for personal services. I do not know if “exemption” is an appropriate word, but it just does not apply to the first $50 on any personal services.

We do not believe the tax rate on services necessarily has to be the same as the sales tax. It is an interesting discussion and some people might disagree with us, which is fine. We are open to that, but for the purposes of this bill, we did not think that necessarily had to be the case.

 

Senator Care:

Section 41 lists the exemptions. We did not want to include transactions within the family, which is what we meant by “affiliated enterprises” in subsection 2. If you recall, we did something similar last session, for example, the transfer of liquor from one affiliated nonrestricted licensee to another. If it is in the family, we did not want to go after it. We wanted to exempt new residential construction. The thought here was we did not want to exacerbate the increasing price of a new house in Nevada, especially in Washoe and Clark counties. We did not want to touch child care or health care nor did we want to include public utilities, at least those governed under chapter 704 of NRS. The theory is a utility is just going to seek a rate increase and pass it on anyway, so what is the difference? We also did not want to include advertising. We thought all it would do is add to the cost of the goods. Garbage collectors would also be exempt. We anticipated a lot of complaining from people asking “Why him and not me?” You are going to find that in any kind of tax legislation. Looking at the possibilities for exemptions, this is simply what we came up with in the process we gave you.

 

In section 72, again, there is that 10-year moratorium. Is this a tax on consumers? Well, we are sensitive to that argument, but again, the first $50 does not count on personal services. You do have the exemptions I think go to the consumers, basically, child care, health care, and those sorts of things. The taxes I have in mind would be on legal services. You have to remember, businesses pay a lot of money in this State for services. They pay for legal services, engineering services, consulting fees, accounting services, and the like. You make the businesses pay a tax on those transactions and I think you really are going after businesses that now do not perhaps pay their fair share.

 

Before I leave the tax on services, or transaction tax, I am going to refer you to the exhibit from the tax department (Exhibit V). The services tax analysis, which is on page 2, shows a yield of $450 million for fiscal year 2005. However, the computations we received from the Legislative Counsel Bureau (Exhibit X) show $659.59 million in FY 2003-2004 and $690.94 million in the second fiscal year. You see quite a discrepancy again. We ran into this time and time again and you will as well.

 

Senator O’Connell:

I would like a clarification regarding the first $50 being exempt for a personal service. For example, I go to a beauty shop and have a haircut, shampoo, and permanent and my bill comes to $76. When the shop manager rings it up, is he or she just going to ring up the portion over $50? How will they do it? I know that is all you want taxed, but how are they going to put it into practice in reality?

 

Senator Care:

That is a good question and I do not have an answer. I am not trying to dodge the question. It is just that we are not claiming to be tax experts. Again, what we are trying to do here is focus on a way to raise additional revenues and we know there will be additional discussion. Looking at the example you just gave, what about the customer who comes in and has the job half done and then says I will be back in an hour to finish it. In that case there is no $76. I would feel more comfortable saying I went in and got a shave the first hour and came back and got a haircut the second hour. I guess the suggestion is to look at what has happened in other states, where I am sure they have had time and ways to answer those types of questions.

 

Senator Amodei:

In your example you would be taxed at 3 percent of $26. It is like the first $50 is tax-free. It will obviously create some cash register issues.

 

Senator Coffin:

I have been bothered by this part of your bill from the beginning because I saw the same problems. I saw a lot of people unbundling their normal charges. Frankly, if there were going to be a tax on transactions, I really think you ought to go to a zero basis. Do it just like sales tax. If it has been talked about as an expansion of the sales tax, make it an expansion of the sales tax. You just tax from the first dollar, because otherwise you will have cheating all the time. There is always cheating and fudging on these things. For example, suppose the lawn person charges you $200 per month. Well, it is going to be $49 per week. It will always be something a little less. You run into a tremendous amount of regulations and interpretation of the regulations. I have a feeling if you are going to pursue this further, you should really go down to zero. You could then consider lowering the rate because you would be getting more money. You could add back what you lose because of the normal cheating on personal transactions. I think it would be simpler to go for more.

 

Senator Care:

You may very well be right. We have had those conversations. Another way to do it is to come up with a larger list of exemptions and then maybe say we will not worry about the $50. We will tax it all but have more exemptions. There again, you run into the additional problem of figuring out how many more exemptions and which exemptions. Then you start thinking maybe it would be too complex to list the exemptions so maybe you will just list the services you are going to tax. You run into the same problem. I appreciate the comment because we have had the same discussion. I would not be surprised if there are others who are going to come up here and say the same thing, which is fine.

 

Sections 79 through 85 refer to the business license fee and the business license tax, which also includes the 10-year moratorium in section 81. The task force talked about an annual renewal fee of $50 for 2 years so the State could gather some data and have a database on businesses. We wanted to just make it an annual fee of $50. We also wanted to go from $100 on the business activity tax (BAT) to $150 and then $200 the second year. We wanted to ease into this thing to avoid sticker shock. Nobody knows where the economy is headed. The war in Iraq appears to be going well, but the economy was uncertain before the war started and has been for several years. We wanted to give businesses the opportunity to get used to an increase of $50 on an annual basis for the BAT and then another $50 the second year.

 

We did include sole proprietors and we have a suggestion for the committee of a possible enforcement mechanism. One thing we have talked about is if an independent contractor who is operating as a sole proprietor, or who contracts with a business to perform some sort of a service, would be required to provide proof of having paid the last quarter’s BAT to the business doing the hiring before entering into an agreement. That would simply be part of a compliance mechanism, but it is something we think the committee might want to consider.

 

If you want to look again at the Legislative Counsel Bureau’s printout (Exhibit X), the revenue from the business license fee is just shy of $4 million for FY 2003-2004 and the business license tax would generate a little above $90 million. In 2004-2005 it jumps up a little to $4.5 million for the business license fee and then a little more than $96 million on the business license tax. Again, if you go to pages 3 and 4 of the tax department computations (Exhibit V), you will see they show $7 million in FY 2004 and $7.2 million in FY 2005 for the business license fee. For the business tax, they show $172 million for FY 2004 including $80 million from sole proprietorships and $177 million in 2005 including an additional $82 million from sole proprietorships. So you again see a big difference in the numbers.

 

Senator Care:

The liquor tax is in sections 86 through 88. What we did here is real simple. We looked at the last time those numbers were tweaked, which, in the case of alcohol, was 1983. We then looked at the CPI in 1983 and adjusted the tax for what it would be today plus a little bit more. One hundred dollars in 1983 would be worth about one hundred eighty four dollars today and would result in an increase of 84 percent. We suggested those taxes simply be doubled across the board. That includes beer, wine, and the various taxes for alcohol, depending on the amount of alcohol contained in the particular liquor. Adopting this approach would generate $20 million in additional revenue, which appears to be a pretty consistent figure.

 

We pretty much did the same thing with the cigarette excise tax. Again, we did not want to create sticker shock. We went back and looked at 1989. One hundred dollars in 1989 would be worth about one hundred forty‑eight dollars today, which would mean a 48 percent increase. However, I think even the tobacco industry is expecting something more than a 48 percent increase. As you know, there is one proposal out there to triple the tax to $1.05 from $.35 for a pack of cigarettes. To avoid the sticker shock, and understanding this is probably one of the most aggressive taxes in the State, we decided 25 cents per pack the first year would take you to 60 cents per pack. You could then add an additional 15 cents the second year. If you look at the exhibits, there was again a slight difference in the computations. This would generate an additional $41 million the first year, according to the Legislative Counsel Bureau and $66 million the second year. According to the tax department, it would generate $40 million the first year and $66 million the second.

 

Senator Care:

The secretary of State filing fees are something everybody is talking about including the resident agents themselves. Our instructions to the bill drafters were simply to increase those fees 50 percent across the board. The tax department did not give us a readout on this but the Legislative Counsel Bureau calculated $17 million in both the first and second years. You may be aware the resident agents themselves came forward with a bill. It is S.B. 298 and it does not just increase fees. It creates a limited liability, limited partnership.

 

SENATE BILL 298: Makes various changes to provisions pertaining to business. (BDR 7-987)

 

Their theory is this is the wave of the future as a business entity and it would be very attractive to have these in Nevada. So even though I think the fees in their bill are less than what is in ours, theirs would generate more revenue than what we proposed with the secretary of State filing fees. You may find yourself even wanting to delete all of these sections pertaining to the secretary of State filing fee because of what has happened with S.B. 298, but the resident agents may want to come forward and give you their own explanation of the bill. We will leave it to them. Their projections were $23 million for FY 2004, which is $6 million above what we came up with in the approach we took.

 

The transient lodging tax is in sections 137 through 144 and sections 172 through 173. I know this one will be controversial. The State’s share of the State tax on transient lodging is only 1 percent. You should have a handout showing the tax rate in the various Nevada counties and municipalities (Exhibit Y). This really is a tax like the task force said about the amusement tax. It has a high degree of exportability, meaning the outsiders pay. We are looking for a 2 percent increase the first year and had intended an additional 1 percent increase 2 years later for a total increase of 3 percent making the State’s tax 4 percent. Clark County currently has a 9 percent tax, which includes the State tax. If you took this approach, it would inevitably go up to 12 percent. In Sparks it is currently 11 percent, Reno is 12 percent, and downtown Reno is 13.5 percent. As you can see, it varies a lot, but in some of the jurisdictions outside of Nevada, even tourist destinations, it is quite a bit higher.

 

We do not regard this as a gaming tax. We regard it as a pass-through. The gaming/lodging industry, in essence, would act as a tax collector as it does now and the State would then end up getting the revenues. The issue here of course is whether people are going to stop coming to Nevada if we adopt something like this. I suppose there will be testimony to that effect and we do not have anything to indicate otherwise. We do know some of the resorts, at least in Las Vegas, did have energy surcharges and I think they ranged from $1 to $3. We also know room rates fluctuate depending on the time of the year, whether there is a certain convention in town, or other types of events. We are not experts in this area but we wonder sometimes whether tourists or groups or industries pay much attention to a room tax.

 

Senator Neal:

Going back to section 142, I thought I understood you to say you are proposing a 3 percent transient lodging tax. The bill says 2 percent.

 

Senator Care:

Currently it is 1 percent. We are talking about going from 1 percent to 3 percent, which would be a 2 percent increase now and then in a subsequent year adding 1 percent for a total of 4 percent. That is the way we intended it to read.

 

The analysis from the tax department shows $64 million additional revenue in FY 2004 and $66 million in FY 2005, but the Legislative Counsel Bureau’s computations show $64 million followed by $68 million. I do not know how it would compute with the additional 1 percent increase.

 

I want to go back to talking about the room tax itself. We appreciate the problems the gaming industry has gone through since September 11, 2001, and perhaps even before. It is woefully unpredictable and nobody wants to do anything to make life more difficult. We will get into gaming taxes here later but again, we regard the room tax as a pass-through. We took the approach of percentage as opposed to a specific amount for a room on a given night. Why should someone staying at Motel 6 on a given night pay $3 while the person who stays at Caesar’s Palace, for example, also pays $3? We tried to make it more equitable.

 

Senator Amodei:

I would like to give just a little more historical backup on the room tax. In 1983, the Legislature imposed the room tax at 1 percent. Three-eighths of that went to the State for use in promoting tourism. Five-eighths went to county fair and recreation boards. So when Senator Care tells you the State gets 1 percent, on the books they may get 1 percent, but in reality 5/8 of 1 percent goes to county fair and recreation boards except in Clark County where the 5/8 of 1 percent goes for capital improvement costs for schools. This was in 1983, which is the last time the State of Nevada came knocking at the room tax door.

We are not seeking to solve our budget problems on the back of the room tax. It was initiated by action by the Legislature in 1983 and we have stayed away for 20 years. Look at for what it is being used. For instance, according to the Legislative Counsel Bureau, Clark County currently is at a rate of 9 percent. Five percent goes to the convention authority, three‑eights of one percent to the State for promotion of tourism, and the county gets one percent. What the county does with the 1 percent is not indicated in the research I have. Transportation gets 1 percent, the school district gets the 5/8 of 1 percent originally, plus another 1 percent.

 

This has been a fertile source of revenue for various and sundry things, many related to convention and visitor things and some not. Part of the funding for the train trench in Washoe County is room tax. In many of the rural counties it goes straight into the general funds. This is not an attempt to take anything away from an existing revenue structure. This proposal is simply saying we created it and we have left you alone for 20 years. Should the State share in revenues from this? When you ask that question, you may also ask what other states are doing and with what areas are we competing. We do not want to take ourselves out of competitiveness.

 

I have a source here from the National Conference of State Legislatures that talks about statewide room taxes on lodging by state (Exhibit Z). Alabama is 4 percent, Arizona is 5.5 percent, and this is the state’s portion, not the local portion. Arkansas is 2 percent, Connecticut is 12 percent, Delaware is 8 percent, and so on. So you see this is not something where we would be breaking new ground in terms of a national sense. The other thing I think is important is that to say gaming is paying this tax is like saying when you pay federal excise tax on tires, the tire companies are paying it, or when you pay gas tax, the gas station is paying it, or when you pay sales tax at Neiman Marcus or The Home Depot, Neiman Marcus or The Home Depot is paying it.

 

This is simply a value judgment where this committee needs to decide if it is appropriate, after creating this 20 years ago, to revisit it as a piece of the puzzle for increased revenues. I do not think it takes us out of competitiveness with the other resort locations. It does take some of what may be available there for additional revenues. I guess the question is, in a state with 40 million visitors a year, on any given week when there are 800,000 on the average in the State, is this a piece of the puzzle in meeting our needs?

Senator Care:

Sections 163 through 165 address the gross gaming revenue tax. The committee is well versed in the arguments and issues affiliated with gross gaming revenue tax and we did not want to disturb the existing three tiers of that tax. We thought maybe as certain licensees become healthier it would be easier for them to pay into a fourth tier, which is where we came up with the 6.75 percent. The fourth tier would be set at anything over $250,000 a month. The third tier as you know was anything over $134,000 a month. We tried to be objective about it. It would be akin to having a gross receipts tax. Instead of getting into 6.75 percent versus 6.5 percent on $134,000 we will just have the higher tier and the licensees who do best, can pay it when they reach the fourth tier. As a matter of fact, many of them are at that tier right now. Again, there is the 10-year moratorium in section 163. The tax department did not give us a computation but we did get one from the Legislative Counsel Bureau. They came up with a little under $45 million for FY 2003-2004 and a little more than $46 million for FY 2004-2005.

 

Section 165 deals with restricted slots. We used a straight CPI application since these were last touched in 1993 resulting in an increase of about 33 percent. Rather than try to restructure this, we decided to go 33 percent straight across the board. The figure we have is roughly $2.4 million in additional revenues yearly.

 

In section 168 we have what we call the employer surcharge tax. This is the tax we came up with in an effort to go after those businesses with a lot of employees who arguably do not pay their fair share. You will notice in subsection 6, we have exempted gaming, mining, agriculture, and utilities.

 

Senator Care:

Specifically, we wanted to leave out gaming with its perhaps as many as 300,000 employees and mining, because mining has its own scheme in the world of taxation. What we came up with here was a scale. We would simply use the same form filed quarterly with the employment division required of all employers and whatever the liability is, just add a surcharge. If you have fewer than 301 equivalent full-time employees, your surcharge will be 35 percent and if it is above 300, your surcharge will be 50 percent. Taking that approach, and it is certainly open to discussion, you could add several tiers if you wanted to and perhaps go higher with more than one bracket. There might be some way to correlate that with the average salary of the employees. So if you think there is an industry not paying its employees much but making a lot of money nonetheless in Nevada, there is a way you can zero in on that industry as well. This is just rudimentary, but it is the approach we took and we hope the committee looks at it.

 

They did not give us a computation on the surcharge. Follow me for a second and see if this makes a little bit of sense. In FY 2000-2001, the State collected about $225 million on the unemployment tax. You have roughly 1 million full‑time employees in Nevada. Suppose a third of those are in the industries we just mentioned, utilities, gaming, mining, and agriculture, which is 33 percent. That leaves you with 2/3 of $225 million or $150 million, so we are talking about a surcharge. If our methodology here is anywhere close to right, we would have a surcharge on $150 million at 35 percent in one bracket and 50 percent in another bracket. Suppose on average that turns out to be 40 percent. Forty percent of $150 million would bring you about $60 million annually. Now, I do not know how scientific that approach is, but we did not get numbers from anybody else. But just doing it that very basic way gives you some idea and I think that very well may be a conservative approach.

 

Senator Tiffany:

Did you know if you are your only employee of your own business, you have to pay this unemployment insurance tax? You are really a sole proprietor and what you have done is set up a tax corporation, but you are the only employee. Would you intend to snag them in on this too where they are already included in the business activity tax and the license tax? I mean you are catching the little guy here, possibly.

 

Senator Care:

Which is precisely what we do not want to do. To be honest, we were looking for a vehicle to go after the retailers and the banks, which is who everyone is talking about. We do not want to go after the small guy with this. The committee may very well say the scenario you just gave would not apply. When I talk about coming up with additional scales or tiers, you may very well want to exclude the first 25 employees. It is something to look at and an approach to take.

 

Senator Tiffany:

That is something I have to deal with and which I just paid. It amounted to $425, so it is not a tiny amount. If you pay that and then the percentage, the BAT tax, and the license fee, you are starting to add a fairly large chunk of change from one guy who went from zero. When you talk about sticker shock, that is what I call sticker shock.

 

Senator Care:

Yes, and we are also mindful too. Every so often you will see those magazine articles that grade the business climate of particular states trying to attract businesses, especially if they are trying to diversify. Nevada is always up there and we do not want to do anything to disturb that, but again, the emphasis here was to key this so the more employees you have, the larger the bite would be.

 

At this point, I would like to turn it over to Senator Amodei to discuss the rainy day measures, the property tax measures, and some of the other items we have in the remaining sections of the bill.

 

Senator Amodei:

We have sections talking about revenue reform and also Fund to Stabilize Operation of State Government, the Rainy Day Fund, and it gets back to what I mentioned to you earlier. As we evolve from a tiny State into a small State, we need to change the way we do things like budgeting and how we handle our resources, collections, and our operations. These are all measures we found when we reviewed the minutes and reports the task force submitted in terms of passive revenue generation and expenditure reform. That is what those consist of. They are meant to bring up this issue in the context of discussing new revenues. I think we have come to the end of our ability to say we need more money for “whatever,” if we are not looking seriously at changing the way we do business as a State. We need to look at the way we budget as a State and the way we do oversight as a Legislature for those things.

 

With respect to the Rainy Day Fund, $135 million is simply not much of an insurance policy as our budget grows, which after this session will be more than $2 billion. As we talk to people about how we want them to play a larger role in how we fund this State, I think it is appropriate to also talk to them about how we are going to try to build a realistic insurance policy on behalf of this State. Even after all of this, we are a very tourism-dependent State in an economic sense and this is how we will try to build a realistic insurance policy for when we have downturns in revenues related to how many people visit our State.

Because we had to start somewhere, we thought the figure, for discussion purposes, ought to be at least $400 million if you want a realistic insurance policy for a more than $2 billion budget. We saw how long $135 million lasted and we discussed whether we needed more to get through the final quarter of this fiscal year. That is not a real safe fiscal position to be in and this committee was in the forefront of discussions of whether we need to do something right now on an emergency basis. Do we need to go see those cigarette folks? Do we need to go see those business folks?

 

I know some people are sensitive to raising revenues in order to fund something like this, but if you do not have that insurance policy, it is our opinion you will have the discussions like we have been having for the first 60 days of this session. Therefore, if we can protect the business people, the retired people, and the gaming people of this State from those types of situations, then I think we ought to do it. It is not something that is going to happen real fast because to build up a balance like that, you have to hope the world is going to be a stable place, which it has not been, and then you have to fund it significantly. Do you want to put $60 million a year into the Rainy Day Fund? It takes you 6 smooth years to get close to $400 million, but if you get there, hopefully you have got some sort of hedge against what we are going through right now as a State. Thank God we had the $135 million, but we do not have it now and everybody is holding their breath.

 

Senator Amodei:

The final thing I will talk to you about is the property tax, because you are looking for stability and I know it is controversial. I think the task force or the Governor came out with a 15 or 16 cents increase on property tax. We came up with 5 cents each year for 2 years, so at the end it is a 10-cent increase. I think on a $200,000 home, it equates to somewhere in the neighborhood of $37 a year. Because we were sensitive to some of the issues about cuts, you will see a provision in the bill that says in order to implement this, you have to go back in a budget sense and cut $25 million a year. We picked that number more as a symbol than anything else. It is about a 1 percent cut in the budget. It is not a great commitment to major cuts in the budget and if this committee thinks there ought to be more, then obviously it is your job and your prerogative.

However, we do think it is important when we are talking to people about what could potentially be the largest tax increase in the history of the State, we also need to touch the base where we talk about cuts. This is not to say there have not been significant cuts done already, but it needs to be thought out in any discussion.

 

In order to access the increased revenues from the property tax, you have to implement those cuts a little over 1 percent a year. However, because we are sensitive to constitutional concerns and do not want to be accused wrongfully of telling people in other branches what to do, we have not said where those cuts might take place. That is left to the discretion of the executive, which we think is appropriate. Further, we do not even say you have to do it. If you do not want the additional property tax revenue, do not cut the $50 million over 2 years. Rather than being heavy-handed, we have said if you want the property tax portion of it, we think we need to provide the 1 percent cut as part of the mix. We do not honestly think a 1 percent cut in the overall budget is a huge message to send in that regard.

 

I would like to talk for a minute about the present atmosphere. You have heard about legs on stools and I know some of you did a leg or two in 1991 or maybe one in 1981. Here we are looking for more legs for stools. You know, it is interesting to see the exclusivity that has come out with respect to specific proposals and I hope you have made note of the fact this proposal provides a potential framework. Obviously, there is more work to be done. The legislative process contemplates something other than somebody coming before you and saying “Here is my plan, vote on it, pass it, and how dare you criticize it.” There are legitimate areas of criticism in here and you are about to hear it. I think it is normal in our process to solicit input. It is not normal however, to give a proxy to any one industry, any one adviser, or any other entity in terms of telling us what to do. I have heard some frustration in terms of people saying, “You know you folks have done a ton of studies and you have ignored them, and now you have commissioned other stuff through concurrent resolutions, and how come you are not just doing what they say?” The people who are ultimately responsible for what is done here or what is not done are the folks who hold those 63 election certificates and we ought to go through the full process before deciding what to do.

Senator Amodei:

You know, it is interesting the tryouts for the “Evasion Olympic Team” are already underway. You have heard testimony claiming if we go with the gross receipts tax, we are going to bust all those firms up into different cash registers. You have heard if we go with a services tax, we are going to hire people in‑house or we are going to form an entity. That is why we went to the transaction-based things. I noticed all my brethren and sisters in the public accounting business think this is a terrible thing, but of course, if there is a return to be filed, this is a great piece of business for those folks. No matter what we do, the hardest thing to enforce is something non‑transaction based. It will take resources, oversight, additional regulation, and it will be harder to get, but the objective is clearly more money for the State. Our job is to raise the most amount of money we can, responsibly, and spread it in the fairest manner possible.

 

There are a couple of things I would like you to keep in mind when you decide what you are going to do with all of these. We must act in a reasonable, responsible, and timely fashion. We need to do something during the regular session. The best place to do so is in committee rooms like this, on the record, having the discussion you have been having today, and are going to continue to have. Past history tells us if we do not act, people will act for us in the initiative petition process. If we start making our tax policy at the ballot box in this State, the two groups with the largest amount to lose are business and gaming. Therefore, I think the time for putting those rivalries up front has come to pass and we need to figure out what we need to do to get those behind us.

 

Finally, I want to tell you this. I looked through the Legislative Manual today and as I look at this committee, sitting in front of me are 137 years of legislative experience. Some of your careers span 4 decades, many, 3 decades, 75 regular sessions, and 25 special sessions. I cannot think of a better group on this side of the building to make these decisions. Those who would have you think there was a task force, or a group, or an entity out there knowing better than you, have them show up with 137 years of legislative experience dealing with many of the tax issues we have dealt with in the last 20 years, and let us take a look at their résumés.

 

Senator Neal:

In section 164, tell me how you arrived at 6.75 percent on $250,000 gross revenue per month.

Senator Amodei:

We wanted to do two things. We wanted to have unrestricted gaming play a part in this overall package because, quite frankly, we were tired of hearing about how we let those folks go. So we went up a half percent and created a new bracket at the highest-end operations. We did not want to create the bracket at the existing cut point because it would take in a lot of operations not fitting the stereotype of the high-end folks. If you look at this and wonder why gaming was included, I would say $40 million out of a potential $800 million is not fixing the State’s fiscal problems on the backs of gaming.

 

Senator Neal:

Is $40 million the amount it would bring in?

 

Senator Amodei:

Yes, the new bracket would bring in that amount.

 

Senator Care:

I should point out too as we were doing this over a period of about 12 months, we made inquiries of the Legislative Counsel Bureau and those numbers were fairly consistent. In fact, those have been the most consistent numbers of everything we have talked about tonight.

 

Senator Neal:

Is there any particular reason you did not visit the exemptions?

 

Senator Care:

My understanding is there is another bill out there that deals with the exemptions and is sponsored by a couple of very experienced Senators. We did not get into where you can cut nor we did get into exemptions. We focused on other ways to raise revenue.

 

Senator Neal:

Why do you refer to your proposal as broad-based?

 

Senator Care:

There are 12 components to this bill, 12 different mechanisms to levy a fee and 3 of them currently do not exist. We would consider that to be broad-based. We really did try to consider everybody here.

 

Senator Townsend:

On behalf of all of us who have ever served here, I want to thank you for the lengthy effort you put in over the number of months you worked on this. I appreciate the creativity with which you took the time and effort to think through all of these. Most importantly, I appreciate the manner in which you have brought it forward as an attempt to get this dialog moving in a number of directions in which we can all work together. It is really to be commended.

 

There are just one or two issues I would like to ask about. There are a number of exemptions in the other bill, plus in the whole area of real estate transfer areas that have not been examined. Are you amenable to that conversation? My second question is in regard to the new service tax. Is it your belief you would collect those taxes when you collected the money, as opposed to when you billed the money? I know many services, such as the profession you are in, as well as accounting, do not always get the money when it is billed.

 

Senator Amodei:

The exemptions area is clearly an area where there is potential to raise significant revenue and we have no objection to revisiting some of those value judgments made over the years. Regarding the tax on services, we do agree with your analysis in terms of it being based on what your collections are, not what your billings are.

 

Senator O’Connell:

First of all, I would like to echo what Senator Townsend said about the effort you have put into this and the fact you did it to begin with. I think you really deserve a big hand.

 

Section 147 talks about requiring each agency to identify the reason any position has remained vacant for a period of 12 months. Are you doing any more than just asking the agency to identify why? I mean are you saying the position should then be eliminated? It would seem to be the logical follow-up. The next one I love is section 176, which would reduce the expenditures by $25 million. I think that is a good beginning point.

 

Senator Amodei:

A lot of the cutting done recently as a result of the present budget issues was positions that were actually vacant. I think the process was if a position is vacant for an extended period of time, unless there are special circumstances, then maybe it is not in fact necessary. We found there were several hundred positions in State government that were in fact vacant and had been vacant for a while.

 

Senator O’Connell:

You do not follow up with that in the language of the bill, do you?

 

Senator Amodei:

Well we could if there were four votes on the committee for it.

 

Senator O’Connell:

I think there might be. I would like to tell you that although I do not agree with much of what you have in here, the reason I signed on to the bill was because of the philosophy both of you have stated in your initial comments about why you brought it forward.

 

Chairman McGinness:

Before we begin discussion on this bill, let me say I think it has become quite obvious a major tax generator is not going to come out of this committee before the deadline. Some bill will get a waiver so this discussion will continue and by Friday there will be a number of revenue generators not making the cut. However, in my estimation, the piece of paper may die, but the concept will not be dead. Whatever bill gets chosen to be the bill for the waiver, in my opinion, everything is on the table.

 

With that said, we are going to have to limit discussion. The staff asked for 2 weekends after this bill was introduced to put together numbers like this, so it is not their fault. It is just a function of the 120-day session, the deadlines, and how those work. As I mentioned, there will be a number of bills that will not make it, but no idea is going to be dead on Friday. I would like to get the executive summary testimony tonight. Committee, there are a couple of amendments in your folder, one from the state controller (Exhibit AA). There is also a letter from Dean Heller, Secretary of State (Exhibit BB). We will accommodate the state controller first and then we will take roughly an hour of testimony from those people in favor of the bill and roughly an hour from those opposed.

 

Kathy Augustine, State Controller:

I have given you a schedule of receivables due the State of Nevada (Exhibit CC). After I read my prepared testimony (Exhibit DD), my chief accountant of debt collection, Christi Thompson, will go over the proposed changes to the bill.

 

Christi Thompson, Chief Accountant, Accounts Receivable, Office of the State Controller:

I will briefly outline the points of the proposed amendment. The last two pages of your packet (Exhibit AA) show a table outlining the proposed changes and some of the reasons for those changes. The first one would eliminate the sunset provision on the pilot program of withholding licenses with DMV and wildlife. It would also create a program of withholding other state licenses. This will give us more leverage to use when we are trying to collect debt.

 

The second point allows the controller’s office to develop a consistent Statewide charge for a returned check fee of $25. The Statewide standards would supersede some of the individual agency’s statutes. This would allow uniform and consistent treatment among agencies. The third point would authorize the controller’s office to adopt regulations necessary to carry out the provisions of NRS 353C. The current language allows the Department of Administration and the attorney general to jointly adopt regulations.

 

The fourth point would have the controller’s office prescribe the time, form, and manner of periodic reports of debts owed to agencies. Currently, the language in NRS 353C says the Department of Administration and the attorney general’s office prescribe the form. The fifth point repeals the $200 restriction for reimbursement of cost and fees for collection of debt. We feel it would be more equitable to charge everyone uniformly for the fees. We figure this can save the State up to $25,000 for the large settlements.

 

We would also like to add language stating if a debtor defaults on a payment plan, lapses a year in payment, or has only made a partial payment and a year lapses, the controller’s office could go back and recalculate and add on fees again, even if the maximum fees were already reached. This would create an incentive for a debtor to adhere to their payment plan and allow the State to start the collection process over if a year lapses without payment.

 

The seventh point proposes when an agency turns over a debt to the controller’s office, the agency will stop accruing additional fees and allow us to charge interest to the debtor. Currently, some of the agencies, after they have turned the debt over to our office and it has gone on to the collection agency, want to accrue additional fees. This has created some problems for tracking in our office and also with the collection agency. This will ensure uniform and consistent treatment among agencies.

 

The last point will give us the authority to write off uncollectible debts under $500 and debts where the cost to collect exceeds the debt. This process will not keep the account from being collected at a later date if it is later determined to be collectible.

 

Senator Tiffany:

How did you determine to arrive at a $25 fee for a returned check?

 

Ms. Augustine:

It was the amount Senator Raggio had proposed a couple of years ago for private businesses. Currently, there are different amounts being charged by different agencies in the State, some as low as $10. We wanted to establish just one returned check fee for the entire State. We also want to be able to have the capability within our office to also charge a returned-check fee.

 

Senator Neal:

Do I understand from reading this amendment you would want all of the debts from the various agencies to be turned over to you for collection?

 

Ms. Augustine:

Yes, they would actually go out to a debt collection agency. The Department of Taxation has signed a contract with OSI Collection Services. If you look at the receivables summary (Exhibit CC), in excess of over $21 million has been turned over to OSI Collection Services.

 

Senator Tiffany:

I am assuming this would be part of the passive savings we talked about that would come to the State. If this does get implemented, how much do you believe you can bring in extra for the State?

 

Ms. Augustine:

Currently, we are working with about $7 million and we have collected about 25 percent of $118 million, so anywhere between $25 million and $50 million each year of the biennium.

 

Senator Tiffany:

Would that revert to the General Fund?

 

Ms. Augustine:

Yes.

 

Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce:

I would like to echo commendations of both Senators Care and Amodei on their bipartisan support in trying to solve a policy issue without the politics. I am testifying today on behalf of what has been referred to as the Business Representative Group. It is a group of many different business organizations, business associations, businesses, and chambers of commerce. We met for over a year trying to come up with a way in which we believed a tax on business would be the most equitably instituted. We support many items in the current bill and for brevity purposes I would like to focus on an expansion of the sales tax base.

 

There is an inexorable shift in spending from purchasers of goods to purchasers of services and the business community, as consumers, is a large purchaser of services. We believe an expansion of the sales tax base to select services is a way to capture a growing portion of the economy. We believe the breadth of the tax base provides stability of revenue and to a certain degree, predictability of revenue. More importantly, the average household and therefore the average person will pay less under this proposal because it is an expansion of the base and a lowering of the rate on the product side from 7.25 percent to 5 percent. You have a sheet in your handout (Exhibit EE) illustrating this fact.

 

We believe this tax on services at 5 percent and then lowering the rate on the product side will generate $400 million to $500 million in new revenue. In fact, we believe this can be implemented as soon as January 1, 2004, and over the full implementation fiscal cycle, will generate $485 million a year in additional revenue. This would be in addition to the doubling of the head tax this group has previously supported. It would be in addition to the secretary of State fee increases and the passive revenue generators, which is about $605 million a year. We believe this tax on services can be designed so that businesses and higher-income individuals pay the bulk of it.

 

As I indicated before, we have seen some research indicating that businesses are purchasers of services to the extent of 53 percent of all services purchased. We also believe businesses are major users of outside services and we also support this structure. We believe it can be designed to avoid pyramiding. It allows business consumers and in fact all consumers to make informed choices of how they will spend that money. I will point out the analysis we had done shows if you include the taxes the average household would pay under this proposal, their savings is still nearly $90 a year.

 

Samuel P. McMullen, Lobbyist, Retail Association of Nevada:

On that last point, actually it is $90 if all of the services are taxed. Our proposal would not tax the services shown in the right-hand column of page 2 (Exhibit EE). There is an actual annual savings of $250 to the average household. When we say average household, we are talking about the average people. The average person in Nevada will pay less in taxes under what we are proposing than they currently pay because of the 2-cent-plus reduction in the sales tax on products. At the same time we are raising an incredibly significant number of dollars for Nevada and the problems it has.

 

A list we have proposed of nontaxable service categories is shown on the first page (Exhibit EE). We want you to look those over to see if we have missed any. You may choose to do less or you may choose to do more. Our goal was to make sure we did what we said we would do, which was to make sure businesses would pay a giant share of a broad-based tax. This is clearly a broad‑based tax just as sales tax is a broad-based tax. It is also a very broad‑based business tax, which if our testimony is not proof, it will be proven by the people who show up from business to tell you they do not like it. We just recently have learned that business pays for 53 percent of all services in the State, which are projected for FY 2004 to be $55.6 billion. Tangible goods are projected at $37.2 billion, so as we have testified before, the economy in Nevada matches the economy of the United States where transactions are 40 percent purchase of goods, taxable and nontaxable, and 60 percent purchases of services.

 

Through this list of our proposed nontaxable service category exemptions, we reduced the projected $55 billion by over half. What was left was a pretty clear indication that nearly 100 percent of the services we are proposing to be taxed would be services consumed by all business, big and small, and wealthy people who can afford those services.

We said those people would pay a giant share and this basically, is a giant share. It is 100 percent of the services that would be taxed. Doing this would give us the capacity to reduce the sales tax by 2 percent.

 

We have produced some slides (Exhibit FF. Original is on file in the Research Library.). I will not try to take you through all of them, but we have basically produced a mechanism. We have used some of the legal counsel involved in the legislative process for years to help us try to make sure everything we are proposing passed the legal tests.

 

Chairman McGinness:

Is the slide on page 8 of your handout kind of a snapshot of your plan?

 

Mr. McMullen:

The left side of this chart represents those purchases of goods and consumables that are taxed, and the right side represents services. As I have indicated, well over $25 billion is represented by the category on the right side. Our proposal was to create a new tax on services at a 5 percent level. You can see we have tried to equalize the rate. The theory was to reduce sales tax as much as possible, which was a clear purpose of the charter of A.C.R. No. 1 of the 17th Special Session and the task force. Our point is, this LSST revenue does not disappear. It would be recreated and replaced by the first large increment of the service taxes on the right-hand side of the chart. This leaves the rate when you are finished at 4.25 percent, which includes the sales tax that goes to the State, and the 2.25 percent that is basic and supplemental city/county relieve tax. On top of the 4.25 percent State rate, local government has the option of adding 0.75 percent, as is the case in the two large counties. This would make the total sales tax rate 5 percent. Again, the State sales tax rate would have been brought down to 4.25 percent, fully implemented.

 

If you look at page 14 of your handout, we feel this service tax could be implemented much sooner than the gross receipts tax. In fact we believe it could be implemented as early as January 1, 2004. If you could impose this at a 5 percent rate by creating a new service tax effective January 1, 2004, you could also reduce the sales tax on products at the same moment. We proposed a 0.5 percent reduction, which is about $180 million on the very liberal side. We suggested the board of examiners review and certify the revenue 6 months later. If the revenue was over $300 million, you could then reduce the sales tax another 0.25 percent and an additional rate reduction of 0.25 percent for every additional $125 million. Of course those implementations in reductions would occur in the next budget year, October 1, 2004. Six months of this tax at $25 billion would raise $600 million.

 

If you replace $180 million of revenue from the LSST you could probably reduce the sales tax as much as an additional 1 percent or 0.75 percent. By October 1, 2004, you could have the sales tax on products already down 1.25 percent without any loss of revenue and actually it would probably over‑generate revenue. It raises more money than you need to pencil the budget correctly to the penny. Consequently, you will have some freedom and flexibility as those funds come in. You can also replace ending-fund balances and, if you wanted, pour it over into the Rainy Day Fund. You would still be looking at coming into the 2005 Legislative Session with additional reductions triggered through the next 6-month process of board of examiner review. This Legislature hopefully, at that point, having approximately a year’s cycle of the tax, would know exactly how it could be equalized. But you can start tax relief as soon as you impose the service tax. Finally, we have provided some proposed amendments to this bill (Exhibit GG).

 

Mr. Endres:

I am appearing on behalf of the 7-Eleven franchise owners in the State of Nevada. With me today is Rich Rose, president of the Cal-Neva Franchise Owners Association, who has a few comments to make in support of S.B. 382.

 

Rich Rose, President, Cal-Neva 7-Eleven Franchise Owners Association:

We represent 53 stores in the northern Nevada area. I am also speaking on behalf of the 7-Eleven stores in the southern Nevada franchise owners association. We support S.B. 382 and/or the concept of broadening the tax base. Why do we do this? We do not want the sticker shock spoken of earlier. We want a broad-based tax where we can say we either want a particular service or we do not. Other forms of taxation do not give us that option. Some people say businesses do not use services. If you exclude our payroll, payroll taxes, and our inventory variation, services account for over 52 percent of my business so we would be paying our fair share on this tax. It is a tax we can manage.

 

Ms. Vilardo:

I have a series of technical amendments, which I will present to the committee in writing to save time. I have spoken to both Senators Care and Amodei and there are two provisions that should have appeared in the original bill and I would like to explain those. Senator Townsend asked a question about cash versus accrual method of accounting. That provision is in section 45, subsection 4 where it specifies the department audit is based on how you file with the Internal Revenue Service. Unfortunately, that section was missing. The amusement tax, which follows, has the same issue and I will give you the language in all of those sites.

 

We do support the amusement tax. We would prefer to have no exemptions or specify exemptions rather on a dollar amount because we think it would be easier to handle. The transaction tax on services needs a number of technical amendments, which I will provide, hopefully, no later than Thursday. We have consistently supported an expansion of the sales tax base to services. We believe this is a little too broad. We have done this since 1991 and we have appeared before the interim committees specifically asking them to begin by instituting a limited tax on primarily business services and discretionary purchase services.

 

That being said, there are some changes we would like to see. Our preference would be to have this match within the sales tax on tangible goods so the local governments also received a share of this revenue. Right now our whole emphasis has been on taking care of the State and the next cyclical shortfall, which will be 10 to 13 years. We are going to have to take care of the local governments because we have not done anything to try to have their tax base reflect the economy. As already identified, the business tax was to have been phased in. Our position is we could take the first year phase in and while our board thought $150 was acceptable, it did not support going to $200.

 

The alcoholic beverage tax, the cigarette tax, and the changes in the sales and use tax, which was in sections 96 and 97, in effect, was part of what is called the passive revenue generators. Regarding the secretary of State fees, there is another bill on the other side, which I believe is better worded. I believe this bill is superfluous because those same amendments were offered in the other bill. I think we would have been more comfortable with the lodging tax at one and one instead of two and one, but that is a policy decision for the committee. I support all of the revenues and the board does support all of the revenue reform provisions. We do not take a position on gaming taxes or the insurance premium tax because they are industry-specific.

Ms. Vilardo:

The business surcharge is the other important one. The business surcharge and how it is worded in the bill speaks to employment security. Employment security was to have been the basis because there were specific numbers and it was auditable. In discussing this with Senators Care and Amodei, the idea was to have that as the basis for which you would create the surcharge, but the surcharge would be one or two lines added to the business tax form under the jurisdiction of the Department of Taxation because it is a General Fund revenue source. It was not supposed to have been an employment security collected tax.

 

I will provide you with language if you choose to proceed. We do not have a position on that, as I have not gotten sufficient response from my board to be able to speak to it. I do believe the mechanics are an absolute problem as it is worded in the bill, and you can confirm this with both Senators Care and Amodei. I truly believe the taxpayers of this State are obviously going to assume an increased liability for the tax directly or indirectly. This committee knows better than any other committee that it is the end consumer who purchases the goods or the services who will pay for any of that cost. To that end, I think there is an obligation owed to those taxpayers to provide some of the expenditure reforms contained within sections 147 to 155.

 

I would like to add an amendment to the expenditure-enhancements revenue issues that would say “No tax may be enacted after the 110th day of session.” My nightmare right now is that we are going to wind up with a series of bills that pass the last day or next to the last day of session. Every time that happens it takes us about a month to find out what the bills did and what are the problems. At least having a 10-day cushion would give us some time to have enough people look at a bill knowing they had accomplished what they set out to do.

 

Senator Tiffany:

Does that mean fees too?

 

Ms. Vilardo:

As far as I am concerned it does. There is a federal definition of fees. If a fee is

used to support the general operation of a government, it is a tax, no matter what you call it. If the fee is used for the administration or regulation of a specific agency in covering a very limited scope and does not get deposited into the General Fund, then it is a fee.

 

Senator Tiffany:

There are a fair amount of those sprinkled throughout these bills.

 

Ms. Vilardo:

I have counted close to 40 fee bills so far. They are revenue enhancements, plain, pure, and simple. Most of the money in most cases is going to the General Fund.

 

Mr. Chinnock:

I am passing out another booklet with a new date of April 8, 2003 (Exhibit HH. Original is on file in the Research Library.). The booklet Senators Care and Amodei had (Exhibit V) was a pre-final booklet. There is new information in this booklet, primarily in the revenue end. It probably will not be any closer than the ones he discussed, but I would like to go through some items very quickly. On page 1, we would implement the admissions and amusement tax on a monthly basis because it is a spectator/participatory tax.

 

There is a provision in the bill for a 1 percent collection allowance. It does bifurcate the collection allowance so it applies if it is paid in the first half of the month. We are not positive we can apply this with the information technology we have, so we would like to have the language inserted “at such time that the department is able to implement it.” It applies to the first $10 of any admission charge and you can see, the new number I have as far as revenue is $40 million. Originally, the numbers being talked about only included spectator and I felt there needed to be an increase as a result of including participatory. Then, because of exempting the first $10 admission charge, I decreased that amount somewhat. Additionally, instead of 3200 accounts, because of the participatory aspect of it, we came up with 5000 accounts. We do not see a problem with being able to implement on January 1, 2004, as provided in the bill.

 

The basis of the services tax on the next page has already been stated. I would note there is not a collection allowance provided in the services tax as there is on the other consumer-paid taxes. I would also note there are three sales and use tax permits and three separate statutes, NRS 374, 377, and 377A. The permit fee is currently $1 on the old statutes and we propose increasing each of those three permit fees to $5. I had difficulty coming up with a number with respect to the sales tax on services. We looked at other states and the one I went with was Florida due to the nature of the number of people who visit, being it is a tourist-oriented economy. Florida levies a 6 percent services tax. Their basis of the tax comes out to about $15,000 per population in the state of Florida, which seemed high to me. I would have used $10,000 other than the fact we are exempting or giving dispensation on the first $50 of personal services. For this reason, I used $7500 as a unit of measure for every man, woman, and child in Nevada, which is where I came up with the $450 million. That equates to a tax of $225 per person.

 

Mr. Chinnock:

As far as the number of accounts, I asked around and researched it and felt the number of services accounts we would end up with would be double those of our tangible personal property accounts. Therefore, I came up with 120,000 accounts. I also figured about half of the 60,000 tangible property accounts we have on sales and use tax would be in a position to pay a services tax. That means we would have an additional 90,000 new accounts which is the figure on which I estimated the manpower we would need. If you look at the resources column on page 2 (Exhibit HH), you will see the number is large at 120 personnel. I knew there would probably be some questions so the next two pages show how I came up with the numbers. The process is pretty much the same process I testified to on the Governor’s tax proposals.

 

I know Mr. McMullen talked about the lead time and implementation time, but because of the number of accounts, I am very concerned we cannot make it by January 1, 2004. When you see the total manpower we would need for the department, I just do not believe we can implement it without having a year’s lead time. Even with a year lead time it would be difficult to hire the total number of people you see in the back of your booklet.

 

Going on to the business license fee of $50, there was a provision for a $50 reinstatement fee. That provision is to be implemented on July 1, 2003. I suppose if a bill like this was to pass right now we could probably plan on it.

We are concerned about being able to implement the $50 reinstatement fee because if it passes, it likely will be late in the session. We are going to be playing catch-up on any business license fee and any business tax, but there is statute to permit it. Therefore, I believe it would be a better option perhaps if we could implement the $50 reinstatement fee on July 1, 2004.

 

This adds sole proprietorships, which would add another 60,000 accounts giving us a total of 140,000 accounts. Earlier testimony indicated the cost of implementing a business license fee would be $6 million, which is not the case. If you would look on pages 15 and 16, the cost to implement and run an annual business license filing fee would be $483,000. The $6 million cost you see on page 6 is the cost of adding sole proprietorships to the business license fee and the increase in the number of accounts and the amount of the business tax. We could implement this on July 1, 2003.

 

The business tax was doubled in the bill to $200 per year and there were some comments on where I came up with the yield shown on page 7. Currently, with no sole proprietorships and at $100 a year, we collect $80 million a year. This would double that amount bringing it to $160 million. When we added the sole proprietorships, we came to the $170 million figure.

 

The doubling of the excise tax on liquor has already been discussed. There has also been testimony on the cigarette tax. We pretty well matched the Legislative Counsel Bureau’s figures on the revenue the cigarette tax would generate. In prior testimony, we indicated we would need three personnel in our excise tax section, primarily because we were saturated in our workload and also because of the additional workload brought about by the increase in cigarette tax with respect to compliance. I would note under A.B. 460, we have shown we would need six personnel under that program. For all of the excise taxes, we are programming a lead-time of July 1, 2003.

 

ASSEMBLY BILL 460: Makes various changes regarding manufacture, sale and use of tobacco products. (BDR 15-1283)

 

Mr. Chinnock:

We came up with $20 million in revenue from the use tax provided in this bill and it would be filed with the annual business license fee. We showed a lead‑time of July 1, 2004, only so we could program our current information technology to issue it with the annual business license fee. Our Automated Collection Enforcement System (ACES) was created on a calendar-year basis and not a fiscal-year basis, so it does need to have some additional programming.

 

The lodging tax has been pretty much discussed already. Even though the department does not directly provide for department oversight, we put one additional tax examiner in our excise tax section to oversee that. I also proposed considering the strengthening of NRS 244.3354 because all the different cities, counties, and entities that oversee this tax do not have to have the same definition. They do not have to apply the tax to the same transient lodging even though they all do. However, they could change it if they want, so I would recommend a strengthening in the statute.

 

You heard Ms. Vilardo address the employer surcharge. We left it pretty much blank because we were unsure if the Department of Education, Training and Rehabilitation, Employment Security Division, or we were going to administer it. We will look at it more closely since it now sounds like we are going to play a bigger role.

 

Pages 16 and 17 give the individual costs for all of the different taxes proposed in this bill. The bottom line for the biennium is about $10 million a year and in some cases $11 million because of the start-up costs in the first year. The total would be $21.4 million with a total of 195 persons for the department. Our current manpower in the department is 225 personnel so this is nearly a doubling.

 

Finally, page 18 just gives again, the testimony we heard in prior meetings regarding the fact the department is woefully in need to replace its ACES system and to provide automation. We ask you to consider that need and the provisions for it. Even though we can implement these current taxes with our current system, there needs to be the flexibility in the future for new information technology.

 

Finally, the state controller has already proposed an amendment to section 161, which we do support.

 

Senator O’Connell:

Has the division, or perhaps even the administration, ever considered some of
these companies with which you would contract to collect taxes at no charge to the State, but charge by the transaction itself? About three different companies have come in and talked to me as an individual and they probably have talked to some of the other members of the committee as well. There is no cost to the State up-front and they already have a program in place that collects the tax and sets up the software for whatever tax structure you have.

 

Senator Townsend:

Some of the larger jurisdictions use these because the information technology companies are able to upgrade on a regular basis without an expense to the State for additional computers, software, or personnel. They simply charge a fee based on the transaction. It eliminates personnel issues and the outdating of software and hardware. I have met with a lot of the same companies and have seen some of their proposals.

 

Mr. Chinnock:

We have also looked at some of those companies and we find them in two categories. The first category are those companies that can actually build a unified tax system that would house a database, do the analysis, compute tax owed, send out the bills, do the collections, and process all the adjustments. We have found those companies to have a substantial cost and require a substantial time frame to accomplish those things.

 

We then found another category of companies who do the billing type activities and can do them relatively quickly at a per-item charge. However, they still must rely on the database and the actual software located within the agency. Therefore, we have not found a company that could entirely do, in this case, our services tax and just deposit the money in our accounts. If I could have the names of those companies, I would be pleased to contact some of them and find out. We have found companies that actually do build the integrated tax systems on a cost-benefits basis where they will go ahead and build it up-front and then do their collection over a 3- or 5-year period. However, again, there was a substantial cost to this.

 

Senator O’Connell:

Is it as substantial a cost as what you have just given us as far as the personnel and the $21 million you are talking about?

Mr. Chinnock:

I would say yes.

 

Senator Tiffany:

Are the 195 people you will need to add to staff the operations permanent people and were you considering then outsourcing and contracting the software development? Have you ever gone through, in your previous jobs, this type of a substantial implementation of this large of a system?

 

Mr. Chinnock:

As far as substantial change, in this job I have not. We have gone through substantial change in prior jobs, but if you are talking about the computer system, no we have not. As far as the 195 people, when I testified before your subcommittee, we were talking about 141 people. Hopefully, by about May 1, we will have the answer on what the best way is to implement new technology in the department. It could go all the way from in-house to being out-sourced.

 

Senator Tiffany:

Were these 195 operations people or were they potentially computer development?

 

Mr. Chinnock:

Most of them are operations people. Probably six to eight of them are information technology. Because of the degree of change and the amount of upkeep that would be required, we believe those information technology people would still be needed. We put a provision in our budget for outsourcing of information technology consultants in the start-up costs for a 2- to 3-year period.

 

Senator Townsend:

Was there any discussion as you prepared these fiscal notes for both the previous proposals as well as this one on where you would actually find 140 to 195 qualified people who are willing to work at these wages and live here in this area?

 

Mr. Chinnock:

That is something I worry about all the time. It would be very tough and it is why I asked for at least a year. I am not sure you could even hire that many qualified people, train them, do all the gearing up, pass all the regulations, and do it in a 1-year time period. It would be very difficult.

 

Senator O’Connell:

Has there ever been any consideration of moving the department to the southern part of the State?

 

Mr. Chinnock:

We have about 90 personnel, which is not quite half of our department located in Las Vegas. The only reason we do not have more is because most of our processing is done here in Carson City.

 

Senator O’Connell:

I think you would have a much larger workforce to choose from in the south.

 

Russell Fields, Lobbyist, Nevada Mining Association:

I will read some written comments and request they be included in your record (Exhibit II).

 

Danny Thompson, Lobbyist, Executive Secretary-Treasurer, Nevada State American Federation of Labor-Congress of Industrial Organizations:

I want to start by thanking Senators Care and Amodei for bringing this bill forward to begin the discussion on this important issue. Last year at our annual convention, we established a policy to follow and take position on issues we know are coming. We knew the tax issue would be discussed and there would have to be a solution to the problems we have in funding schools and services in this State. Our board looked at the different taxes available and took a position on each one of those.

 

We started with the gaming and decided against raising the tax on gaming. With the proliferation of gaming, we did not feel it was prudent to increase a tax on a business currently providing almost half of the money in the State as well as employing a lot of people in good jobs with benefits including insurance. We looked at mining. We opted against raising that tax because the mining industry pays their own unique taxes. We looked at the tax on services, and of all the things we talked about, this is the tax nobody wants. We looked at the taxes we already pay as individuals. We pay property tax, gas tax, insurance premium tax, privilege tax on the registration of our vehicles, rental car tax, and sales tax. When you get your utility bill there are more taxes and franchise fees than you can figure out. On your property tax bill, there is a line item called “indigent care,” which really strikes home to us. We believe without a broad-based business tax, you are not going to get the person who is at the end of the cause-and-effect problem you have with the budget.

 

Right now, as an example, Wal-Mart is the largest employer in the world and yet 62 percent of their employees have no health insurance. When a child of one of those employees falls off of a bike, they still take them to the hospital. If they do not have health insurance, they do not pay. The county then pays and those indigent care tax dollars I pay, and all my 165,000 members pay, end up paying that hospital bill. It would be nice if such a company as Wal-Mart, who can afford to pay, but who pays substandard wages and does not provide the benefits mining and gaming provide, paid for those problems.

 

Mr. Thompson:

When someone goes to the doctor and does not pay, they end up on the indigent rolls and the indigent tax takes care of it. If the person promises to pay and then does not, it comes back to us again with the hospitals and the providers raising the rates for those of us who do have insurance and can pay. I think a clear line can be drawn to large employers who pay no taxes in this State and provide no health insurance for their workers and the Medicaid budget, which is going through the roof. That is the cause and effect we are very concerned about. The question here is who is going to pay. That is what this is all about.

 

I think we have already established the fact there has to be more money. Something has to change. Structurally, we have a problem and it is not going to get any better unless we have new money in new tax dollars. The only question left to answer is who is going to provide those dollars. Is it fair for your constituents who already fork out more money than they can afford in many cases, to be stuck with these taxes on services? I do not think so. I got a loud resounding “no” on this issue from all of our members. They want nothing to do with this tax. Without an across-the-board, broad-based business tax, you are not going to solve the kind of problems the Wal-Marts of the world are creating. Further, it is getting worse. Raley’s just went out of business in Las Vegas. All of those workers at Raley’s had health insurance and they were replaced with 1600 workers who have no health insurance.

We looked at payroll tax, which we do not support because we believe it is a disincentive for an employer to hire employees. We believe it is anti-growth. It certainly is a disincentive for an employer to provide those kinds of benefits the State ends up stuck with if the employer cannot provide them. Believe me, there are plenty of small businesses who cannot afford health insurance, but for the big companies that can, they should be doing it. Without a broad-based business tax, you are not going to catch those people. In fact, we believe an employer who provides health insurance should be given a break. An employer who can afford it and does not should pay more. All of the problems associated with the budget start there.

 

Glen Arnodo, Lobbyist, Culinary Workers Union Local 226 Hotel Employees and Restaurant Employees International Union:

I want to applaud Senators Care and Amodei for at least initiating a discussion we need to have. However, Senator Care, in his opening remarks said something to the effect of ultimately, we all end up paying taxes, which I do not think is true. I think it is true in this bill because it contains a tax on services, which we vehemently oppose. A true broad-based business tax paid by businesses is really the only fair solution in our minds to broaden the tax base. I am somewhat mystified as business after business comes up and says they are in favor of a broad-based business tax, but then end up proposing this whole complicated set of taxes. This ultimately includes a tax on our members through a tax on services.

 

I am not an expert on tax policy, but somehow when we want to tax gaming, we simply tax gaming. When we want to tax insurance companies in this State, we simply tax insurance companies. When we want to tax mining, we simply tax mining and it does not seem very complicated. However, when we finally get to the point of trying to get the Wal-Marts, the Banks of America, the Wells Fargos, and other big corporations in this State to pay, all of a sudden it gets complicated. We have to do it through a tax on services and hundreds of other taxes none of us can seem to figure out.

 

We sat down with one of our culinary members and his family and he kept meticulous records. We had him look at his family’s last 3 years of expenses in order to evaluate how a tax on services would affect them. This family may or may not be typical but I am sure it is much like average Nevada families. They have two incomes and they own a house, and two cars. They also have an array of expenses appearing to be taxable under this bill. At the extreme end, if this family were to get taxed on the money they borrowed for their home or their cars, they would have ended up paying $4000 a year in taxes over the last 3 years. I would assume the authors of this bill did not intend for people to pay taxes on their whole mortgage, but it is a service, after all. You are borrowing money from a lender. Even taking away the absurd notion they would have to pay taxes on their mortgage or what they owe on their cars, this family would still have ended up paying an average of $733 a year in additional taxes over the last 3 years.

 

We will compare that to Governor Guinn’s and the task force’s proposals. Both of those proposals include an amusement tax, increases in liquor and cigarette taxes, and a property tax increase. The task force’s proposal would cost a nonsmoking family $170 more in taxes each year while the Governor’s proposal would cost $177, much lower than the amount we figure one of our member families would have to pay under a tax on services. This is because both the Governor’s proposal and the task force’s proposal included a true broad-based business tax. Although there are no studies we know of showing how much an individual would pay under a service tax, we have heard various figures. You heard tonight what businesses estimate they would pay as opposed to the rest of us, but at the end of the day, somehow we end up paying 40 percent or 50 percent under a tax on services. They may be good at selling that concept, but I do not see how it ends up being a broad-based business tax. If business purchases 40 percent of services, who purchases the rest? We do, working Nevadans and our families.

 

Unlike the sales tax, not much service tax would be paid by tourists. Tourists do not pay Little League fees, they do not buy insurance, and they do not fix homes in our State. Tourists do pay approximately 28 percent of the sales tax we collect, while residents pay 41 percent according to the task force. If residents end up paying 50 to 60 percent of a tax on services, we would be paying a higher percentage of a services tax than we pay on sales tax. The business community, for the most part, has united in opposition to a business tax in support of a tax on services for one simple reason. We think they want us to pay the bills. Our State only has one broad-based business tax, the business activity tax, which funds less than 5 percent of the State’s General Fund. Tripling that tax, which has met fierce resistance, would only bring it to 15 percent of the General Fund revenues. Right now, the retail industry in Nevada pays only 1 percent of our General Fund revenues. The banking industry pays 0.10 percent. Large corporations here are accustomed to someone else paying their bill and we think it is time they pay their fair share. We estimate from this exercise, this family would pay between $733 and maybe $4000 a year more in taxes depending on what you ultimately decide is a taxable service.

 

Mr. Arnodo:

Let me walk you through some of these expenses. They sold one home for $115,000 and bought a used home for $180,000 in the year 2000. The way this bill is worded, they would have paid the service tax on the real estate agents fees, on the title company’s fees, and on the mortgage company’s fees. It even appears they would have to pay the service tax on the amount of the money they borrowed to buy their home. The authors may not have intended mortgages to be taxed like this, however, they did not attempt to explicitly exempt them from the bills, like advertising fees were for businesses. At the short end, buying a house would be $4300 more expensive if the lending services are taxed. This family also refinanced their mortgage in the last year, as almost every home owner likely has. If the mortgage were considered a taxable service under this bill, it would certainly make refinancing prohibitively expensive.

 

Insurance services are another substantial household service cost. This family purchases home owner’s insurance, car insurance, life insurance, and home warranty insurance, annually. Taxing these services would raise their taxes by almost $100 a year by itself. That is in addition to the 2 percent insurance premium tax already levied by this State and presumably passed on to buyers. This family would have been taxed on gym classes and swimming lessons for their toddlers, auto repairs, rug cleaning services, and the installation of an air‑conditioning unit in the home. They can look forward to paying taxes on Little League fees and Scholastic Assessment Test preparation courses as their kids grow up. While not necessarily common, this family also would have paid almost $1000 in taxes for using an attorney following a car accident, which injured one of their family members. The car accident was the fault of the other driver and the proceeds of the legal action primarily paid for medical expenses and attorney’s fees.

 

Will we really tax our kids’ Little League or gym classes because we do not want big corporations in this State to pay taxes on the millions of dollars they make in Nevada? Is it right to tax credit card services or home loans because we do not want to tax Bank of America and Wells Fargo on the money they make financing Nevada’s growth? It is time for large, nongaming businesses to pay more than 5 percent of the State’s General Fund. We need a broad-based business tax, not another tax on working Nevadans.

 

Our members cook and serve food, clean rooms, and scrub toilets all day just so their kids can have a shot at the American dream. They pay their fair share now and I think they would be willing to do more. However, we think it would be a gross injustice if you ask them to do more when the big corporations of this State are not brought to the table to truly pay a broad-based business tax.

 

Senator Townsend:

I appreciate your representation and you and I have had this discussion before. No one agrees more with you about those who do not pay health benefits to their employees more than I do, which I think is just socially irresponsible. While I do not have an answer, I am determined before we leave here to find one together because I think it can go directly to those things you related. I appreciate when you put this together and your remarks were constructed, they were constructed on the bill before us tonight. I do not have an answer to the health care issue. You, Mr. Thompson, and I have had this conversation more than once and I am prepared to put in the kind of time my two colleagues did to bring this forward to try to solve, if nothing else, that particular issue. I happen to be very familiar with the plan you have developed. Without question, it is the finest in the world and you are really to be congratulated. It is pretty serious relative to money that could be going to other things, additional salaries for teachers and textbooks and anything else to which we can agree.

 

Linda Kincaid:

I have been a culinary union member for 37 years. I have worked for Bally’s for 21 years and I am here in opposition to S.B. 382. I feel this bill, if it is passed, would really hurt working-class people like myself. I had a really bad experience after September 11, 2001. After 21 years of service at Bally’s, I was laid off for 8 months and it took a long time for me to regroup. My husband and I went into a lot of financial burden because of it. Ultimately, I was hired back at Bally’s and just when I thought I was getting back on my feet, my air-conditioning and heating went out. It ended up costing us $4646 to repair our unit. If this bill is passed and this service tax goes through, it could mean another $100 to $150, which for a person like me, would pay a power bill, or gas for my car for the month. I just feel big businesses should have to pay their fair share as well instead of putting the burden on the middle-class taxpayer.

Senator Neal:

I would never agree with Mr. Thompson and Mr. Arnodo that gaming is paying its fair share and I have stated the reasons. Gaming has a position in this State no other State would allow. People do not understand the cost of having gaming in this State for which we pay dearly in terms of tourism, and in terms of employment. This is not my position, this is the Governor’s position based on a study. For each 8000 employees, the State pays $4.3 million in service costs to service those individuals. No other industry exacts that cost. What we have to understand is whatever tax plan we put forth, if we do not tax gaming sufficient to the problems gaming causes, we are going to be here year in and year out trying to raise these particular taxes. Currently, the burden of tourism falls upon you and I and other people to pay. Of course, it is difficult for some of you to acknowledge, and it is difficult for gaming to acknowledge.

 

Ms. Kincaid mentioned September 11, 2001. If you look at the record, the gaming industry had a little dip after September 11, but their stock went right back up and it stayed up right through February and March. We just read in the paper where Terry Lanni, chairman of the MGM Mirage got something like a 150 percent increase in salary. I do not think the gaming industry pays those folks if they do not make money for them, so they are making money. I would hope somebody would take a look at that and start putting the burden where it should be. Gaming is the big gorilla here and they have the money. They do not want to pay, but I think they should pay.

 

Mr. Arnodo:

We have had this debate a lot of times and I am sure it will never end, but when you say gaming does not produce anything, you should look across the table at Ms. Kincaid. Gaming produced her and 50,000 other people like her who can own their own home, send their kids to college, and have health insurance and a retirement plan. If Wal-Mart and Bank of America produced the very same thing in our State, we would be better off.

 

Senator Neal:

Those individuals have a product. The only product gaming produces is an empty pocket. Gaming is money-intensive, a dollar for a dollar, and it is something we need to understand. I understand it because I took time to study it. At one time, I was the person here supporting gaming saying, “Yes, gaming can do everything they want to.” I am no longer of that opinion because I know

if we do not tax them sufficient to the problems they cause, we are going to be right back here in the next session and the session after trying to increase these taxes.

 

Mr. Arnodo:

If every other employer who could provide health insurance did, we would not have the kinds of problems we do.

 

Ms. Kincaid:

As taxpayers ourselves, my husband and I had to cash out our individual retirement account to pay this bill of $4646. We each took $2500 out of one of our retirements we had been saving. I just do not understand why businesses like Wal-Mart or Bank of America should not also have to pay a tax. I understand what you are saying about the gaming, but what about these other corporations?

 

Senator Neal:

I will not debate you, but just let me give you one particular fact. You should not have been laid off, because they were not under any strain. They could have kept you on, but did not.

 

Senator Coffin:

This panel is important to me because Mr. Thompson and I served together in the 1983 and 1985 Legislative Sessions when sales tax on services came up the first time. It was never approved but it is quite possible it was not thought through because no one ever proposed a reduction in the sales tax. We ought to think about a blend of what has gone on here. You were not prepared to testify to the Business Representatives Group proposal. You were pretty well geared up for S.B. 382. I think we all ought to keep an open mind on these things. I came here committed to trying to make the Governor’s proposal work. The commission put in a lot of time and there was a lot of thoughtfulness there. On the other hand, I have heard a lot of testimony on it and it does have some problems along with some virtues. I can see some virtues in the plans presented here tonight, so I do not want us to just immediately chop everybody else off at the knees, if you will. We need a chance to go back and look at their bill and really see what is wrong with it. You have not had time to do that and neither have we.

Mr. Thompson:

When I look down the list of taxable service categories provided by the chamber of commerce, everything Mr. Arnodo mentioned is on there, legal fees, banking, et cetera. Banking is a big one because everybody banks. I have never heard of some of the things on this list. If you are going to lower my sales tax by 2 percent, but then raise something else by 3 percent, I would suggest to you that is a 1 percent increase. Not to dismiss anything out of hand, but it certainly looks that way to me.

 

Senator Neal:

If you have not been told, I am a withdrawn member of the culinary union. I could be an active member tomorrow.

 

Brian Ayala, Chairman, Las Vegas Latin Chamber of Commerce:

We have a great deal of respect for the process you are tasked with in trying to come up with a consensus on taxes. It is almost an oxymoron. The Las Vegas Latin Chamber of Commerce has not taken a position on this tax bill. We testified before the Governor’s task force from an inquiry standpoint. We are here more from an inquisitive standpoint and we are here to understand and obtain clarity on S.B. 382 and the effects it would have on our members and specifically, small businesses. We need to understand which services will be included in S.B. 382. I know some have been referred to but there are others about which we have some questions, some of which I would like to list.

 

I know advertising was referenced to be exempt. Will insurance be included? Does it fall under the utilities exemption? Is commercial and office space leasing included as a service? Speaking to this from a business procurement perspective, what about parking, seminars, travel, entertainment, and entertaining clients? If you take a client golfing or skiing at Lake Tahoe, is that included? Another would be a royalty fee you pay for a franchise. Those are just some expenses which, if included, could substantially affect some small businesses.

 

I understand not every business is the same, but I also want to know if there has been an analysis done on the impact S.B. 382 would have in comparison to the Governor’s and the task force’s bills. I heard Senator Care say they tried to not affect small businesses, but which services are included is going to be a determining factor in what the impact would be. In addition to which services are included, a 35 percent increase, as I understand it on unemployment taxes, would contribute significantly toward an impact in addition to the services. Do not get me wrong. We are going to need to be taxed as a community, as a business, or a blend of those. I am only saying from a chamber standpoint, the majority of our members are small businesses and that is one of the things we want to take a look at and understand the impact it does have.

 

One other concern would be the progressive nature of the sales tax. It tends to disproportionately impact the low-income citizens. This bill references a broad based tax, which is something I am not completely sure I understand at this point. Last, whatever tax we come up with should be easily administered.

 

Van V. Heffner, President/Chief Executive Officer, Nevada Hotel and Lodging Association:

I will give you an executive summary for the opposition on behalf of the 182 members we represent with over 115,000 rooms and who employ over 160,000 Nevadans. I am going to discuss our opposition to the transient lodging tax and the room tax sections of the bill. According to an analysis done by the American economics group of the American hospitality foundation, a 2 percent increase in the bed tax in the nation would result in well over half a million jobs lost. It would result in billions of dollars in lost wages as well as billions of dollars in lost sales. Also, $280 million in state and local tax collections would fail because of this. The analysis revealed an average of this 2 percent increase would in fact be a real reduction of room sales of 5.1 percent. This reduction would spill out over every sector of the economy.

 

I happen to be the author of the master plan for tourism in 1982 which established the Nevada Commission on Tourism, allocating 3/8 of 1 percent tax for tourism promotion with 5/8 of 1 percent to go to all local convention authorities, special events, and fair and recreation boards for promotion. When that tax is raised, you have to be very careful because you have to make certain you generate enough marketing and promotion of increasing business to roll those dollars through every community providing jobs and an opportunity for growth which we do well here in Nevada. Also cited in this study was Atlanta, Georgia, where a 2 percent bed tax increase actually cost 8410 jobs and dropped combined state and local tax collections. When you look at transient lodging tax as a source of revenue, you can really damage one of the good generators of jobs and income for an area.

A number of states addressed this issue in 1993. Arizona banned discriminatory taxes on the hospitality industry unless the full proceeds went to tourism. New York State and New York City, with the highest rates in the nation, dropped and revisited their tax rate due to so many lost conventions. They wound up dropping their room tax rate by 5 percent as well as removing the occupancy tax of $1 per person, per night.

 

Be aware that conventions, business groups, and meeting planners carefully examine all room taxes when they are going to any host cities. A lot of our competitors will look at those rates very carefully. As we look at all these on behalf of the industry, we really hope the taxation committee will look not at supporting the lodging tax but being opposed to it as a source of revenue. For each dollar we invest in the State of Nevada in tourism promotion, we get $121 back and that is without any multipliers.

 

Rachel Fletcher, Nevada Society of CPAs:

As accountants we are keenly aware of the need to balance budgets and to make sure the tax base is spread fairly across the population of the State. In our opinion, this tax on services will not accomplish the three tests we had talked with the Governor about when we spoke to him about the gross receipts tax burden being fair, transparent and easily administered. The Nevada society has prepared a commentary on the sales tax on services proposal (Exhibit JJ). I will not go over it in detail because of the time limitations but I would like it entered into the record. I have also given you my notes (Exhibit KK) on what we are going to try to cover today.

 

First, the tax on services is not fair because it is not broad-based. We feel a tax on business should cover all types of businesses in addition to service business. This bill exempts too many services. For instance, I think it was Senator Care who mentioned they were specifically exempting new home sales because they wanted first-time home buyers to be able to buy a home without this additional cost. However, there are people building homes up the hill from me in Montreaux starting at $899,000. Those are all brand new houses I do not believe should be exempt and it is just one example of many.

 

In addition, we believe the tax rate is too high. In our case, we are a small business employing 18 certified public accountants. We do tax returns for small businesses in Nevada and we also have clients in California. One of the reasons they come to us is because of our competitive prices, so an increase of this type cannot be passed on to our California clients. We have clients in South Lake Tahoe. Why would they come to us when we are going to charge them more than the firm down the street in California? Those make up approximately a third of our business and therefore, the tax rate we cannot pass through to those California clients would effectively cause us to have a net income tax of about 12 percent. We believe if it cannot be passed through to the client, it is going to cause us an additional burden, which is true for all service businesses.

 

In addition, the tax is regressive. Most of our clients are small businesses and individuals and we cannot charge them less than $50 for a tax return. The old couple across the street in the retirement home is living on a fixed income. Their certificates of deposit have been getting increasingly lower rates. They are afraid to invest in the stock market and we are therefore increasing the cost of doing their tax returns. About 750 of our returns are prepared for those types of individual clients who cannot afford that kind of an increase.

 

This tax also fails the transparency test. We are talking here about pyramiding where we do the tax return for a manufacturing business and we have to charge them this additional tax. It then goes into a product having a sales tax on it in addition. We also believe the tax would not be easily administered. Mr. Chinnock was talking about increasing the number of employees they would need to register 90,000 new accounts. Most of those are going to be small accounts such as the hairdressers and the gardeners who are sole practitioners. For our business it is not a big a deal to file the returns because we have a firm administrator, but for a lot of the sole practitioners, it will be very burdensome.

 

In addition you are going to have to deal with sourcing issues like when we worked for a client in California. How are we going to split the income between the time we actually spend in California versus the time we spend in Nevada? Is it more beneficial for us to have an office in California so we do not get taxed in Nevada? It is also going to be difficult to monitor out-of-state vendors. If someone in South Lake Tahoe or Truckee is providing services to people in Incline Village, how are you going to catch those people? So there is also a compliance issue.

 

Newton W. Freeman, Nevada Society of CPAs:

I just want to bring some common sense into the equation. Those who spoke in favor of this bill said you could reduce the current sales tax by $186 million and still, by implementing this tax on services, raise the money you need to bridge this budget gap. I will just assume that is true, which more than makes the argument that this is placing an unfair burden on the service providers. Otherwise, how could it be true? How could you have $250 savings per Nevadan and at the same time raise $600 million in 6 months by taxing services, unless you were doing so in a way that provided an unfair burden on those service providers?

 

There is also something inherently wrong in saying if an individual goes through a divorce costing $20,000 they are going to pay 5 percent, or a $1000 tax on the cost of the divorce. I can fully understand somebody being taxed when they buy a sailboat. If you are going to buy this luxury item, then you should be taxed, but not when you are getting divorced, adopting a child, or defending yourself. There is an interesting one. The State charges you with a crime and then raises money on the amount you pay the attorney in the form of a tax. Can you really do that? So I think there are some problems. One is fairness but it is also hitting the wrong type of expenditure in a very big way.

 

Rossi Ralenkotter, Executive Vice President, Las Vegas Convention and Visitors Authority:

I am here tonight to testify against sections 137 through 144 of S.B. 382, which increases room tax by up to 3 percent. I have prepared testimony (Exhibit LL). I have also provided copies of letters from some of our customers (Exhibit MM) expressing concern with the room tax proposal.

 

Ann Price McCarthy:

I have lived in Carson City for almost 25 years. I am a lawyer practicing primarily in the area of family law. I also have just finished serving two 1-year terms as chairperson of the Family Law Section, State Bar of Nevada, and I still am an ex-officio member of the Executive Council of that section.

 

I wanted to bring to your attention something barely alluded to a couple of moments ago, and the effect this bill will have on the access to justice. Almost every committee of this Legislature every session discusses the problem the people of Nevada have with access to justice in the courts and the ability to get lawyers to represent them and take them to court. I am not sure any of you have taken into consideration the effect this bill will have on people’s access to justice. Legal services are already expensive and rarely discretionary. Lawyer services are also expensive, but people need lawyers. If you put a tax on legal services for families, it is essentially a misery tax. You are going to be charging an abandoned spouse to come to a lawyer to obtain support for herself and her children. You are going to possibly keep families from having wills prepared to protect their families. Someone who is sued in a civil court may not be able to afford a lawyer. Someone who is being brought up on criminal charges, perhaps wrongfully, may not have access to a lawyer because he will not qualify for a public defender.

 

These are things I really think you need to consider. Just as it is in the health care field when people cannot afford the prescriptions their doctors provide for them, they do not buy the prescriptions and they do not take the drugs. What is going to happen here is more and more people are going to try to practice in this extremely complex area of the law by themselves. They are going to try to go to court by themselves. This, of course, is going to provide a double burden on the courts whose budgets are already terribly strained. Ask any judge that comes before you how awful it is to try to help a person who is not a lawyer work their way through the complex court system to get a divorce, or obtain child support, or an adoption, or a termination of parental rights, or a guardianship for their ailing mother, or grandchildren. That is what you are going to affect with this.

 

Most of us who practice family law are solo practitioners or from very small law firms. The bigger law firms usually do not have anyone on their staffs who does family law. It is not a huge moneymaker and the big firms do not usually specialize in this area of law. This tax will also affect us as small businesses because we necessarily have to contract out for many of the services you are considering taxing. We contract out our bookkeeping, our accounting, our janitorial services, and our computer services. So it will affect us, and yet we have the same kind of overhead the big firms have.

 

Birgit K. Baker, Administrator, Employment Security Division, Department of Employment, Training and Rehabilitation:

Senator Care clarified that one of the three premises of this measure was to build on existing infrastructure, which explains why the Employment Security Division was designated to collect the surcharge proposed in section 168 of this bill. However, because of the many exceptions to unemployment insurance law and business rules contained in the bill as introduced, the division has a number of issues needing clarification in order to provide an accurate assessment of our ability to implement this legislation by January 1, 2004.

I had the opportunity to discuss her amendment with Ms. Vilardo, which would transfer the responsibility for collection of the surcharge to the Department of Taxation using information from the unemployment insurance tax form as the basis for the surcharge. Her proposed amendment addresses my concerns about our ability to collect the surcharge; however, many of the issues we have identified for the Employment Security Division will become issues for the Department of Taxation if the amendment is approved. The bill does not include a definition for full-time employees. We look at the unemployment wage records, which would be our mechanism for identifying full-time employees, and those wage records do not separate full-time from part-time workers as they are merely based upon wages reported for employees. So the definition of full-time employees needs to be addressed.

 

The other issue with the bill as written includes imposing the surcharge on reimbursable employers. Reimbursable employers consist of federal, State, and local government, Indian tribes, and certain qualifying nonprofit organizations. This means if it is approved the way it is, State General Fund agencies would be paying State General Fund surcharges and federal and local governments would also be paying State taxes. I do not believe that was the intent; however, that is how it reads now.

 

Also, there is no mention of penalties and interest on unpaid surcharges. There are no rules or priorities for applying those payments if we were to collect that surcharge. There is no discussion about if we are short paid, who gets those funds and where they are credited first. If you look at the definitions of employers who are exempt, would all businesses owned by the exempt person be exempt from the surcharge? What businesses actually registered to do business with the division, and required to file quarterly tax returns, would be exempt from the surcharge? It is difficult to figure out who is truly exempt and how that exemption would be applied.

 

Finally, there is a discussion as to whether the surcharge should remain the same for the next 10 years. As you are aware, unemployment insurance contributions are impacted by experience rate and solvency of the trust fund. Is it the intent to have the surcharge remain the same, or that the rate of the surcharge remain the same? There is a difference there. One of the major concerns for us, if we were to collect this tax, there is the potential for the commingling of funds, which is prohibited under federal law. This creates a conformity issue potentially that could cost Nevada employers over $348 million in the offset credit. I just wanted to make sure you are aware of those issues. We did provide this information to the sponsors of the bill so they are aware of it.

 

Chairman McGinness:

Before we leave, I want to mention a letter I received from Dr. E. Louis Overstreet, P.E., Executive Director, Urban Chamber of Commerce, Las Vegas, regarding the proposed sales tax on services (Exhibit NN). I will not read it to the committee but Dr. Overstreet asked that it be submitted for the record. I appreciate everyone staying here until this late hour. We are adjourned at 10:21 p.m.

 

 

RESPECTFULLY SUBMITTED:

 

 

 

                                                           

Ardyss Johns,

Committee Secretary

 

 

APPROVED BY:

 

 

 

                                                                                         

Senator Mike McGinness, Chairman

 

 

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