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

SPONSOR Marquardt

DATE TYPED 2-21-2005 HB 688

SHORT TITLE Resale of Services Gross Receipts

SB

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

($59,400.0)

Similar Recurring

General Fund

($39,600.0)

Similar Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department

Relates to HB 582

SUMMARY

House Bill 688 expands the deduction for certain sales of service for resale to all sales of service

for resale.

The bill has an effective date of July 1, 2005.

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 gross receipts

tax on sales of service for resale raises about $99 million of revenue. Approximately 60 percent,

or $59.4 million, of the revenue loss is allocated to the state general fund; the remaining $39.6

million represents a negative fiscal impact on local government revenues.

ADMINISTRATIVE IMPLICATIONS

TRD reports that the administrative impacts would be modest, including publication changes,

taxpayer outreach, staff training and development of audit and compliance procedures..

House Bill 688-- Page 2

OTHER SUBSTANTIVE ISSUES

The Taxation and Revenue Department submitted this discussion of the pyramiding issue for a bill pro-

viding partial gross receipts deduction:

“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.

BT/lg