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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

1-30-06

HB

SHORT TITLE Incorrect Gross Receipts Reporting Penalty

SB 323

ANALYST Dearing

REVENUE (dollars in thousands)

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Recurring

Fund

Affected

FY 2007

FY 2008

($100.0)

($100.0)

Similar

Recurring

General Fund

($60.0)

($60.0)

Similar

Recurring

Local Governments

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB 380

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 323 would amend Section 7-1-71.2 NMSA 1978 (being Laws 2004, Chapter 116,

Section 3) effectively reducing the doubling of the difference between the correct and incorrect

deduction claimed when in error as penalty, to only the amount, when there is an incorrect de-

duction claimed. Additionally, Section 7-9-47 NMSA 1978 (being Laws 1969, Chapter 144,

Section 37), would amend the range of documents used to establish a nontaxable transaction for

resale would be extended to include other documents to an approved list supplied by the Taxa-

tion and Revenue Department.

FISCAL IMPLICATIONS

According to the Taxation and Revenue Department;

1.

Under present law, deductions for food and medical services adopted in 2004, a penalty is

imposed for taxpayer failure to correctly report the amount of the deduction. This pen-

alty is imposed at the rate of double the local option tax rate in the business’ location.

Senate Bill 323 – Page

2

This legislative proposal would eliminate the doubled penalty rate, such that the penalty

would be imposed at the rate of the local option taxes only, not a multiple thereof. In ad-

dition, a maximum upper-limit of $10,000 would be set on the total penalty imposed.

2.

Requirements for a seller to claim the gross receipts tax and governmental gross receipts

tax deduction for the sale of property for resale would be modified. Under present law,

the seller must receive a non-taxable transaction certificate from the buyer to be eligible

for the deduction. The proposal would allow the seller to claim the deduction if provided

other documentation to be specified by the Department.

Total collections of penalties under the double-local option have been approximately $100,000 in

the first year. An additional $400,000 is currently protested. Experience suggests that a substan-

tial portion of the latter amount will be abated. Thus, total collections are uncertain but probably

about $200,000 to $300,000 per year. The proposal would reduce these by eliminating the dou-

ble penalty and by imposing a cap of $10,000.

These changes would be enacted effective July 1, 2006.

SIGNIFICANT ISSUES

According to Taxation and Revenue department, if legislation is enacted, revenue would be im-

paired by approximately half of what is currently fined and collected under the current punitive

measure. The amendment to 7-1-71.2 NMSA 1978 would negatively affect the general fund at a

level of approximately $100,000 annually, and would subsequently impact local governments at

a negative level of approximately $60,000 annually. It is unknown as to the level of impact that

the $10,000 penalty cap would have in decreasing current revenue from this source, however,

this is not brought forward as a salient point by the Taxation and Revenue Department and is as-

sumed to be minimal in comparison to the reduction of the multiplier.

ADMINISTRATIVE IMPLICATIONS

According to the Taxation and Revenue Department, administrative implications of this legisla-

tion, if enacted, would include:

Double local option penalty:

The double local option tax penalty has created a significant amount of confusion and conflict

between taxpayers and the Department. Since many taxpayers view the penalty as unfair, they

have been unwilling to voluntarily disclose misreporting that would be subject to the penalty.

The Department has had to dedicate personnel to the task of assessing the penalty. Many of the

taxpayers who have been assessed have protested the assessment. The protests have delayed col-

lections and absorbed more Department resources to resolve. Reducing the penalty should en-

courage more voluntary compliance with the food and medical deductions, which will improve

timeliness and accuracy of distributions at a reduced administrative and compliance cost.

Alternative evidence for deductions:

For many years, gross receipts taxpayers have complained that they have been denied deductions

they were legitimately entitled to because they did not receive an appropriate Non-Taxable

Senate Bill 323 – Page

3

Transaction Certificate (“NTTC”) from the purchaser, sometimes through no fault of their own.

The proposal would give the Department latitude to accept alternative forms of evidence proving

eligibility for the deduction provided under Section 7-1-47 when an NTTC is not available. This

will reduce administrative and compliance costs of the Gross Receipts Tax.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House bill 384 also amends Section 7-1-71.2, setting up a potential conflict if both bills are

passed. HB 384 amends Section 7-1-71.2; however, the HB384 amendment does not affect the

doubled-penalty element that is mentioned within the fiscal implications section of this report.

Instead, HB384 would amend (among other substantial changes) the doubled-penalty such that it

is not applicable to those taxpayers who have entered into an agreement and are subsequently

conducting a managed-audit with the Taxation and Revenue Department, however, it remains in

place for those taxpayers who have not entered into a managed-audit agreement.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

If not enacted, Section 7-1-71.2 NMSA 1978, and Section 7-9-47 NMSA 1978 would exist as

currently written.

PD/mt