NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Suite 101 of the State Capitol Building North.

(Parenthesis ( ) Indicate Revenue Decreases)

*Taxation and Revenue Department does not have information on the value of services provided

to municipalities by service providers located outside the particular municipality purchasing the

services.

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD), bill analysis and fiscal impact report

LFC files

SUMMARY

Synopsis of Bill

This bill amends Section 7-1-14 NMSA 1978 and proposes that the reporting location for taxable gross receipts attributable to the sale of services to a municipality be reported to that municipal location.

FISCAL IMPLICATIONS

The negative impact on the state's general fund results from service providers with business locations in other states or in unincorporated areas where the effective state tax rate is 5.0%. Changing the reporting location to the municipality purchasing the services changes the effective state tax rate to 3.275%. The negative impact on county fire protection and environmental taxes results from similar changes in reporting location. A positive fiscal impact on TRD administrative fees imposed on local option taxes would also result from any shift of reporting location into municipal area. Those fees are currently dedicated to TRIMS/NMFA computer system development bonds.

In sum, certain municipalities would benefit from this bill and others may be harmed. In a municipality such as Albuquerque with a large service provider base, it is difficult to assess how this bill may affect its receipts.

ADMINISTRATIVE IMPLICATIONS

TRD anticipates taxpayer confusion, misreporting and subsequent amendments to reporting locations resulting in an adverse administrative impact to the agency.

TECHNICAL ISSUES

The bill needs to have an effective date section specifying the first day of a month, such as July 1, 2001. Taxpayers must be provided with a notice of changes in tax reporting requirements, such as the taxpayer filing kit which includes tax forms and instructions. Pursuant to TRD's schedule, the next package of tax forms and instructions that taxpayers receive will be for the reporting period of July 2001 taxable activity.

Secondly, HB190 creates an internal conflict within Section 7-1-14 NMSA 1978 in the case where a municipality decides to contract for construction services outside municipal boundaries but on municipally-owned land. Subsection B of HB190 requires construction services be reported to the construction site, yet Subsection E would require it be reported to the municipality letting the contract.

OTHER SUBSTANTIVE ISSUES

According to Taxation and Revenue Department:

• The appropriate reporting location for gross receipts tax purposes seems to present a continuing source of confusion to many taxpayers, at least when the location is other than their usual place of business. When the "place of business" in the common usage of the phrase is identical to "place of business" as used in tax law, there is no confusion. The bill's proposal to change the reporting location based on the entity to whom the service is sold creates a fairly minor, but completely new, level of complexity in tax reporting.

• Compliance with the reporting requirement in this bill would require monitoring by the municipalities affected. TRD's Report 455 entitled Listing of Taxpayers Reporting Gross Receipts to Municipality would provide the necessary information to municipal governments,

but monitoring and follow-up would be the responsibility of the municipality. The department receives no information regarding the entity for whom services were performed.

• Department follow-up on misreported locations would impose an additional burden on the agency, and taxpayer amendments to tax returns would result in negative adjustments to the distribution of taxes associated with the original report location. At least until taxpayers become familiar with the new rule (which could take quite a long time), such adjustments could be expected to be frequent and could cause hard feelings among jurisdictions.



• Many business contracts include provisions to adjust the amount of the contract for changes in tax rates. The department is unsure whether such provisions are common for service contracts with municipalities, but this and other transition issues are possible. It is the department's experience that this is the type of tax law change which may give rise to unforeseen issues.

• The bill would not affect services for refuse collection which are taxed under the Governmental Gross Receipts Tax.

• This proposal pushes New Mexico's tax system one-step closer to the hypothetical national norm.

CMH/ar