BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 27, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB-743 as amended by House Taxation and Revenue Committee

SPONSOR: Representative Marquardt

BILL SHORT TITLE: Correcting the “Alamogordo” Construction Materials Problem.

CONFLICTS, DUPLICATES, COMPANIONS: SB-637 is similar but does not include the provision of HB-189 that proposes a one-year suspension of the right to issue NTTCs by governments and non-profits if these entities abuse the right to issue certificates appropriately.

DESCRIPTION: This bill proposes a solution to the “Alamogordo” problem. (See OTHER ISSUES AND IMPACTS #1 below for background on this issue.) The bill redefines “construction materials” to allow governmental and 501(c)(3) organizations to avoid tax on the parts needed for simple repairs or replacement of fixtures. The bill reiterates the provision of HB-189 to penalize government and non-profits that deliberately misuse NTTCs. Finally, the bill provides a “safe-harbor” if a seller accepts an NTTC in good faith, accompanied by a written statement from a government or non-profit promising that the material will not be used in a construction project.  The HTRC amendment corrects and error.

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          .             	
	<(100)	<(100)	Recurring	General Fund	
	<(50)	<(50)	Recurring	Local Governments	

Newly deductible will be tangible personal property involved in repairs and replacement of broken or damaged fixtures with substantially comparable parts and fixtures. This deduction is limited to sales of tangible personal property to government or 501(c)(3) entities. The Department will regulate when a fixture replacement is part of a construction project and when it is a deductible repair. This line will be narrow to conform to the underlying premise of the GR&CTA. 

ADMINISTRATIVE IMPACT: minimal on processing and audit. Forms and instructions and taxpayer seminar material will have to be adapted to the new changes. Considerable regulatory effort will be required to define when a fixture repair is construction and when it is not, and thus eligible for deduction.

TECHNICAL ISSUES:
1.	If the seller of the tangible personal property is also the installer, then the seller should retain the responsibility of determining whether a fixture replacement is construction or not. This ability to independently determine if an NTTC is appropriate or not means that the seller can not and should not be “off the hook”. A seller who accepts an inappropriate NTTC in this case is simply not accepting it in good faith and, under the terms of the bill, will not be accorded the safe harbor. If the seller is not the installer, then he cannot verify the use of the tangible property and will be allowed to claim the safe harbor.

OTHER IMPACTS AND ISSUES:
1.	BACKGROUND: the founding drafters of the Gross Receipts and Compensating Tax Act created a unique tax instrument that allowed the state to tax services performed for the federal government. The mechanism is that the federal government reimburses by contract the amount of gross receipts tax the contractor pays the state on receipts from services provided to the federal government. The federal government cannot be the taxpayer, however. The next thing the founding drafters did was define construction as a service, with materials largely ancillary. Thus, the full value of construction – labor, leased equipment, subcontract labor, profit and overhead and materials – is intended to be taxable, even when the construction is performed for the federal government (or state and local governments). In the mid to late 1980s, state, local and federal governments began to separate construction materials from construction services. This avoidance strategy first became popular for metropolitan redevelopment projects, but was eliminated by 1985 amendment. Later, local and federal governments recreated the same avoidance strategy, but were forestalled explicitly in 1990 by amendment of 7-9-14 NMSA 1978. Recently, in the Alamogordo area, local and federal governmental units were, once again, attempting to avoid reimbursing contractors for gross receipts tax paid by issuing NTTCs for tangible personal property in situations that they deemed to be repair or renovation, not construction. However, the GR&CTA is very clear on what constitutes construction. “Construction” includes altering and repairing. Thus, the governmental units, by issuing type 9 NTTCs were in direct violation of the spirit and letter of the GR&CTA. Unfortunately, however, it is not the government units that are penalized, but the contractor. A contractor who accepts an inappropriate NTTC and deducts the receipts inappropriately has violated a good faith standard -- and the contractor is assessed pursuant to an audit. At least one of the contractors so assessed has testified that the governmental units are quite deliberate in this avoidance/evasion scheme. Any contractor that includes the gross receipts tax in the price – explicitly or implicitly – will not get the contract. 
2.	This bill should solve the problem. It punishes the governmental unit for issuing a type 9 NTTC inappropriately by having its ability to issue any NTTC, for any purpose, revoked for one year. Thus, the government unit that persists in issuing type 9s for construction will find themselves paying gross receipts tax on their purchase of computers, paper, office supplies, furniture and fixtures and all other purchased tangibles. The Department has agreed to redraw the bright line on repairs or replacement of fixtures. Finally, if the seller accepts an NTTC in good faith accompanied by a written assurance from the governmental or 501(c)(3) organization that the material is not intended for incorporation in a construction project, then the Department may not impeach the statement and assert a subsequent liability. However, note TECHNICAL ISSUE #1. Under circumstances where the seller of tangible personal property is also the installer, the taxpayer can independently verify if an NTTC is appropriate or inappropriate. The Department, under these circumstances, might well assert that the acceptance of an NTTC was not in good faith and subsequently assert a liability.