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F I S C A L I M P A C T R E P O R T

SPONSOR Silva

DATE TYPED 2-19-2005 HB 582

SHORT TITLE Resale of Services Gross Receipts

SB

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

(uncertain) ($9,000.0)

Similar Recurring

General Fund

(uncertain) ($6,000.0)

Similar Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department

SUMMARY

House Bill 582 provides a new, partial deduction for gross receipts and governmental gross re-

ceipts. The deduction is for the sale of services for resale, and is equal to 15 percent of receipts;

the buyer of the service must resell the service and the resale must not be subject to the gross re-

ceipts tax or the governmental gross receipts tax (Note: sale of services for resale that are subject

to the gross receipts or governmental gross receipts tax are already deductible). The buyer must

also deliver a non-taxable transaction certificate.

The bill also strikes language voiding nontaxable transaction certificates issued before January 1,

2005, and requiring the Taxation and Revenue department to issue a new series of nontaxable

transaction certificates beginning January 1, 2005.

The bill carries an emergency clause, making its provisions applicable upon signature by the

governor.

FISCAL IMPLICATIONS

TRD estimates that sales of service for resale will total approximately $1.5 billion in FY06. Ap-

plying an average statewide gross receipts tax rate of 6.6 percent implies that the tax raises about

$99 million of revenue. Multiplying this by the 15 percent deduction, implies a $15 million

House Bill 582 -- Page 2

revenue loss. Approximately 60 percent, or $9 million, of the revenue loss is allocated to the

state general fund; the remainder impacts local government revenues.

TRD reports that the fiscal impacts for FY05 are uncertain. The emergency clause would make

the bill effective for about three months of the year, but the department’s analysis notes that tax-

payer information for this year has already been distributed, and that many eligible taxpayers

might be unaware of the change in time to claim the deduction. On the other hand, assuming

taxpayers learned of the change and took full advantage, the potential revenue loss in FY05

would be nearly $4 million ($2.4 general fund; $1.6 local funds).

ADMINISTRATIVE IMPLICATIONS

The Taxation and Revenue Department reports that it would be difficult to implement these

changes within the emergency clause time requirements. They say that the changes could be

made by a July 1, 2005 effective date.

OTHER SUBSTANTIVE ISSUES

The Taxation and Revenue Department submitted this discussion of the pyramiding issue:

“Pyramiding” in the Gross Receipts Tax:

New Mexico’s gross receipts tax (“GRT”) is one of the broadest-based transactions taxes of

any state in the country. Maintaining a broad tax base enables New Mexico to collect ade-

quate revenue with a relatively low tax rate. Transactions between businesses constitute a

significant share of New Mexico’s broad gross receipts tax base. Since the inputs and the

outputs of businesses are subject to tax, the inclusion of business services in the tax base re-

sults in some degree of “pyramiding,” i.e. multiple taxation of the same product or service.

The GRT has been modified to limit pyramiding on sales of tangible items by providing de-

ductions of sales for re-sale. In the case of services, the analogous deductions are limited to

those cases where the next sale is taxable. In addition, many business services are not “for

re-sale,” but rather are “consumed” by the purchasing business. Thus, there exists a signifi-

cant degree of multiple taxation of services within the GRT. The current system could be

viewed as unfair to businesses that, due to the nature of their purchases, are subject to higher

overall tax burdens than their competitors in New Mexico and in other states.

The proposal would address the pyramiding of tax on services to a limited extent. By remov-

ing a portion of tax from the sale of services for re-sale, the cumulative imposition of tax on

re-sold services decreases. This would benefit, for example, a business re-selling services in

interstate commerce. In such a case, the re-sale would not be subject to gross receipts tax,

but under present law, the initial sale would have been taxable.

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