** REVISED **	BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE: February 26, 2001	Submitted by: TAXATION AND REVENUE DEPT.       
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER:  HB-568

SPONSOR:  Representative Whitaker

BILL SHORT TITLE:  Tax Credit for Certain Off-Road Fuel 

CONFLICTS, DUPLICATES, COMPANIONS:  

DESCRIPTION:  This bill provides for a new refund procedure for special fuel (diesel) users for undyed fuel used off highway and to power equipment other than motor vehicles.  The special fuel tax (included in the price of fuel purchased by fuel users) could be refunded only when fuel is used:  1) to propel the vehicle on locations other than the state’s highways and roads;  2) to operate auxiliary equipment using a power take-off from the main engine or transmission of a vehicle;  and, 3) to operate a non-automotive apparatus mounted on the vehicle using fuel from the vehicle’s fuel supply tank.  The department would be allowed to establish rules, procedures and requirements for determining how to calculate fuel used for off-road purposes and fuel used on the highways.  Refund claims could be filed no more frequently than quarterly for amounts of 100 gallons or more.  In addition, a requirement subjecting sale of dyed fuel to special fuel tax is deleted.

EFFECTIVE DATE:    Not specified – assume 90 days following adjournment (approx. June 15, 2001);
			Applicable to fuel purchased after July 1, 2001 (see Substantive Issues).

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

Estimated Impact on Revenues         	Recurring or		
			Nonrecurring	Funds	
	(FY 2001-2002)	(FY 2002-2003)	     Impact     	         Affected         	
	less than (67)	less than (89)	Recurring	State Road Fund	
	less than   (8)	less than (11)	Recurring	Local Governments Road Fund	
TOTAL:	less than (75)	less than (100)			

The first year estimate illustrates 75% of the full year impact since refunds may only be filed quarterly.  Refunds on fuel purchased during July, 2001 through March, 2002 would probably be processed by the end of fiscal year 2002. 

The revenue estimate is based on somewhat stale information:  the special fuel refund amounts credited against Weight-Distance Tax obligations during 1997 and 1998.  Application of credits against that tax were disallowed after 1998, and the department has no more recent information. 

While current regulations do allow an off-road deduction for taxpayers filing Special Fuel Excise Tax quarterly returns (see Substantive Issues), taxpayers are not currently making use of the deduction.  The Special Fuel Tax consensus revenue estimate has, in fact, always included off-road fuel in the estimate.  Prior to 1999 when the department allowed a credit against the Weight-Distance Tax, the revenue estimate for that tax had been adjusted to account for on-going off-road fuel credits.  When the credit against Weight-Distance was disallowed beginning in 1999, the Weight-Distance Tax revenue estimate was increased to account for elimination of the off-road fuel credits.  The Special Fuel Tax consensus revenue estimate was not specifically adjusted to anticipate off-road fuel deductions, and since the deductions were never claimed, off-road fuel has continued to be incorporated in the tax base (volume history) on which the revenue estimate was prepared.  The fiscal impact estimate assumes the refund scheme proposed in this bill will allow those who do not file Special Fuels Tax quarterly returns a mechanism for claiming off-road use, and may be more convenient for those who file quarterly Special Fuel Tax returns but have not used the current deduction in the past.

SUBSTANTIVE  ISSUES:

•	Any fuel qualifying for a special fuel tax refund would be subject to the state Compensating Tax of 5% of value.  The department would probably require the Compensating Tax liability be withheld from the Special Fuel Tax refund amount. 
SUBSTANTIVE  ISSUES (continued):

•	This bill essentially lifts the deduction spelled out in Taxation and Revenue Department Regulations 3.16.110.9 through 3.16.110.12 (associated with Section 7-16A-11 NMSA 1978) to statutory status.  These regulations specify required records and equipment, and specify methodology for an “alternative calculation” available to off-road fuel users reporting Special Fuel Excise Tax.  Special Fuel Excise Tax filers are not currently making use of the “alternative calculation”, possibly because the regulation is not well known or because the record keeping requirements quite stringent and the calculations somewhat complicated. 

•	The bill should specify that claims for refund should be submitted only by persons who do not file Special Fuel (user) Excise Tax returns.  Use of the “alternative calculation” on the Special Fuel Excise Tax return, and filing a claim for refund under the provisions of this bill, would result in a double refund. 

ADMINISTRATIVE IMPACT:  The department will need 1 additional FTE to process these refunds.  To avoid abuse among claimants of fuel tax refunds, current (and probably the proposed) regulations require extensive documentation and a fairly complex calculation which must be reviewed and verified in a desk audit procedure.  It is not feasible or cost-effective to perform actual field audits on this kind of refund issue, so there is no alternative to extensive desk audit procedures.  Neither of the two processing units where the refund function might reside currently have any spare resource. The department already receives a number of complaints from taxpayers regarding slow processing of gasoline off-road refunds, and the addition of  a new refund function for special fuel will exacerbate the problem.

Development of a rudimentary computer processing system for fuel tax off-road refunds will be required initially, given the expected increase in the number of fuel tax refund requests (the current gasoline tax off-road refund process is entirely manual).  Eventual sophistication of the system may be required to crosscheck refund claims against Special Fuel Excise Tax returns to eliminate claims for double credit for off-road use, and to assure the refund claimant is not a bulk storage user.

OTHER IMPACTS AND ISSUES:

•	Prior to 1999, taxpayers were allowed to claim special fuel off-road “credits” against tax obligations under other tax programs, primarily the Weight-Distance Tax.  When that practice was discontinued, taxpayers who do not file Special Fuel (user) Excise Tax returns were left with no apparent means of receiving any tax credit for off-road use of fuel on which tax had already been paid.  It should be precisely specified that the refund proposed by this bill is designed for users who do not file special fuel excise tax returns.

•	There is no allowance for off-road use of clear (not dyed) special fuel under federal tax law.  Under the federal scheme the diesel is either dyed for off-road use, or is presumed to be for highway use if it is clear fuel.  From a tax administration and compliance point-of-view, the federal scheme is far superior in its simplicity and efficiency to any scheme which allows a credit, refund or deduction for off-road use of clear diesel.

•	Federal tax agencies have found taxpayer evasion and avoidance of fuel taxes to be a surprisingly frequent and widespread problem.  Any complication of the state’s tax system beyond alignment with the simple federal scheme can be problematic.