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

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

2/3/06

HB

SHORT TITLE U.S. Government Contract Gross Receipts

SB 311

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(9,000.0)

(9,450.0) Recurring

General Fund

(6,000.0)

(6,300.0) Recurring Local Governments

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Economic Development Department (EDD)

SUMMARY

Synopsis of Bill

Senate Bill 311 makes several changes to gross receipts and compensating tax deductions for

certain contractors with the federal government.

Currently, Section 7-9-54.5 contains a compensating tax deduction for the value of test articles

used in New Mexico in contract with the U.S. Department of Defense. The bill would allow this

test article deduction from the compensating tax for contracts with all U.S. government agencies.

The definition of “test article” is also expanded to include tangible or intangible property used

for research or testing that is consumed or becomes unfit for use as a result of the research or

testing. While this deduction is currently denied to operators of New Mexico’s national laborato-

ries, it would be denied to operators of any facility in New Mexico for any U.S. government

agency.

The bill creates two new gross receipts tax deductions for receipts from selling research and de-

velopment services or tangible personal property to U.S. government agencies, except for re-

ceipts from selling to a prime contractor for operation of any facility.

Senate Bill 311 – Page

2

Finally, the bill repeals Section 7-9-54.1, which provides a gross receipts tax deduction from the

sale of aerospace services by 501(c)(3) organizations that receive a federal income tax exemp-

tion.

The effective date of these provisions will be July 1, 2006.

FISCAL IMPLICATIONS

TRD reports that industry representatives say taxable gross receipts covered by the proposed de-

ductions average about $230 million per year. Applying the statewide average gross receipts tax

rate of 6.5 percent to this base yields a fiscal impact of roughly $15 million per year. About 60

percent of gross receipts tax collections go to the general fund, while 40 percent is distributed to

local governments.

The bill would also reduce compensating tax collections by an uncertain amount. Compensating

tax is distributed to the general fund (80 percent) and to the small cities and small counties assis-

tance funds (10 percent each).

ADMINISTRATIVE IMPLICATIONS

TRD reports the bill will have minor administrative impacts stemming from form and publica-

tion changes and nontaxable transaction certificate development and distribution.

SS/mt