BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 24, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB – 307 as amended by House Taxation and Revenue Committee

SPONSOR: Representative Hobbs

BILL SHORT TITLE: Compensating Tax Deduction for Contributions of Inventory

DESCRIPTION: The bill proposes a straight-forward deduction from compensating tax for donations from inventory of tangible personal property to a 501(c)(3). Qualifications and limitations on the reach of this deduction include: (1) donated property must be employed within the exempt purpose of the organization, not in any activity considered unrelated business income; (2) donated metalliferous mineral ore may not be deducted; (3) property that will be incorporated into a metropolitan redevelopment project may not be deducted; (4) property that will become an ingredient or component part of a construction project may not be deducted (5) property utilized or produced in the performance of a service may not be deducted. HTRC amendment ties the compensating tax deduction to the IRS definition of and rules regarding deduction.

EFFECTIVE DATE: July 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:

		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
	 FY 2002 	Full Year	     Impact     t     	             Affected          .             	
	0	0	Recurring	General Fund	
	0	0	Recurring	Local Governments	

To date, this is an issue that has surfaced only at audit, involving an insignificant amount of revenue. In general, when revenue is only collected through the audit process, a prospective change can be considered as “no financial impact”. 

ADMINISTRATIVE IMPACT: minimal for processing and systems. This is an audit issue. The usual forms and instructions, taxpayer seminar materials and technical advice memoranda to auditors will have to be updated. 

OTHER IMPACTS AND ISSUES:
1.	Analysis: under current law, receipts from sales of tangible personal property to 501(c)(3) nonprofit religious, educational or charitable organizations are deductible from gross receipts under 7-9-60 NMSA 1978. Excepted are sales of property described in Paragraphs D(1) and D(3) of the bill. Also under current law, donation by a business of goods from inventory to an individual, fraternal organization or taxable business triggers a compensating tax on the donor. The donor, in issuing a type 2 resale certificate to purchase the goods for inventory, is promising to pay the gross receipts tax on the retail sale. If the business owner donates the goods to an individual, fraternal organization or taxable business, then the provisions 7-9-7 NMSA 1978 apply (“property acquired in a transaction not subject to the compensating tax or gross receipts tax, but because of the buyer’s subsequent use of the property, should have been.”). If the business donates property directly to a 501(c)(3) organization, however, there may be no compensating tax liability since receipts from a sale of most tangible personal property to a 501(c)(3) is deductible, and the provisions of this bill might be moot. 

2.	Note that if the business claims the income tax deduction on the wholesale value of the property donated to a 501(c)(3), the donation would probably not trigger compensating tax liability, since the sale of the same goods to a 501(c)(3) organization would be deductible from gross receipts.  So a problem can arise when the donor tries to maximize the value of the charitable deduction from income tax by converting business property to personal use before making a personal donation of the property. It is the conversion of the property to personal use prior to making a donation of the newly reclassified non-business property that invokes the compensating tax. This is another example, among many, of a tax avoidance strategy designed to exploit federal loopholes having unexpected consequences with respect to state taxes.

3.	Construction Materials: To avoid other thorny issues, this bill does not extend the donation deduction to construction materials. This will prevent compensating tax deductions for contributions to entities such as Habitat for Humanity, which accepts donations of construction material, solicits and organizes volunteer labor, and constructs housing for low-income individuals and families. 

4.	Similarly, Habitat for Humanity, performing arts organizations and similar organizations will run afoul of the restriction that the deduction is not available for contributions of  tangible personal property used or produced in the performance of a service. If a business wants to donate tangible personal property and donate its services also in connection with the tangible personal property, the deduction will not be allowed.