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

SPONSOR Youngberg

DATE TYPED 02/17/05 HB 593

SHORT TITLE Architectural & Engineering Gross

SB

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

(*) ($2,200.0)

Similar Recurring

General Fund

(*) ($1,500.0)

Similar Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

(*) uncertain due to the missing effective date.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Department of Transportation (DOT)

SUMMARY

Synopsis of Bill

House Bill 593 expands current tax statutes to allow a gross receipts tax deduction for receipts

from an architectural or an engineering service for sales made to a person in the construction

business. The buyer must have the construction services performed on a construction project

that is subject to gross receipts tax or located on Indian lands.

No effective date was provided.

Significant Issues

DOT provided the following background:

Currently, Section 7-9-52, NMSA 1978, allows a subcontractor to deduct receipts from the sale

House Bill 593 -- Page 2

of “construction services” to a prime contractor if these services are sold and used in a construc-

tion project. However, TRD regulations exclude indirect services from this deduction, such as

accounting, architectural, engineering, and drafting. In theory, these services are consumed by

the prime contractor in the performance of the contract, and are considered normal expenses of

doing business. Therefore, although the prime contractor pays gross receipts tax on the whole

amount in the end, the law allows some pyramiding of taxes. House Bill 593 will simply extend

the deduction allowed under Sec. 7-9-52 to include engineering and architectural services.

FISCAL IMPLICATIONS

The total fiscal impact, as estimated by TRD, is -$3,700.0 in FY06, of which -$2,200.0 will im-

pact the general fund and -$1,500.0 will impact local governments. Based on a taxable sales of

architectural and engineering services to persons in the construction business estimate of $57

million in FY06, TRD calculated the total impact using an average gross receipts tax rate of 6.5

percent. TRD’s analysis was based on information from the Department’s “Analysis of Gross

Receipts Tax by Industry Classification,” 1997 Economic Census for the State of New Mexico,

and input-output estimates from Implan, Inc.

ADMINISTRATIVE IMPLICATIONS

None to TRD.

Although DOT is arguably the single largest consumer of engineering and architectural services

in New Mexico, DOT notes that the bill does not affect the department directly.

OPJ/lg