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

SPONSOR Snyder

DATE TYPED 1/31/05

HB

SHORT TITLE Business Services Tax Credit Act

SB 151

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

(14,900) See fiscal impact section Recurring

General Fund

(2,200) See fiscal impact section Recurring

Local Funds

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Economic Development Department (EDD)

SUMMARY

Senate Bill 151 enacts the “Business Services Tax Credit Act”. The stated purpose of the act is

to reduce the tax burden on businesses that result from multiple impositions of transactional

taxes upon the sale or use of services purchased by businesses.

The act defines qualified expenditures as those defined under section 162 of the Internal Revenue

Service Code that are subject to the gross receipts tax, with certain, specified exceptions. It also

establishes the amount of the credit to be equal to qualified expenditures multiplied by a speci-

fied rate that increases over time. For FY06, the rate is 0.5 percent; for FY07, the rate is 1.0 per-

cent; for FY08, the rate is 1.5 percent; for FY09, the rate is 2.0 percent; for FY10, the rate is 2.5

percent. However, the bill also provides for a lower rate that is equal to half the rates reported

here, for hospitals which are currently allowed to claim a deduction equal to half their receipts.

The credit could be applied against gross receipts, compensating and withholding taxes and un-

used amounts could be carried forward to future years.

The bill carries a July 1, 2005 effective date.

Senate Bill 151 -- Page 2

FISCAL IMPLICATIONS

TRD estimates that the base eligible for the credit is $3.48 billion. The fiscal impact in FY06 is

equal to this base multiplied by 0.5 percent, or roughly $17. Impacts grow in the later year as the

rates and base increase. The base is estimated to grow by 5 percent per year.

TRD notes that local impacts are the result of the 1.225% of the 5% GRT that is shared with mu-

nicipal governments and the 20% of the compensating tax that is shared through the small cities

and small counties revenue sharing programs.

TRD’s table estimating impacts through FY 2010 is shown here:

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY 2006 FY 2007 FY 2008 FY 2009

FY 2010

(14,900) (31,300) (49,200) (68,600) (89,500) Recurring General Fund

(2,200) (4,700) (7,400) (10,300) (13,400) Recurring Local Govern-

ments

ADMINISTRATIVE IMPLICATIONS

TRD reports the following administrative issue:

The proposal would force major changes in the Combined Revenue System (“CRS”)

through which the Department processes approximately $3.5 billion of state and local

revenue annually. Because of the large number of taxpayers affected, the credits could

not be processed manually, as is done for the other credits under present law. Automated

processing will require forms changes and changes in returns processing that would be

expensive and time-consuming, resulting in slower revenue processing. Automated proc-

essing also means that the only enforcement tools available to insure accuracy of report-

ing will be audits. Audit frequency is limited, so inaccuracies and non-compliance will

be more common than with other tax credits.

In addition to non-recurring systems re-design costs of $200 thousand, as much as 4 FTE

worth of increased workload will be imposed on the revenue processing function

.

BT/yr