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: SB – 111 as amended by Senate Finance Committee

SPONSOR: Senator Cisneros

BILL SHORT TITLE: Electricity Sales Tax Act

CONFLICTS, DUPLICATES, COMPANIONS: SB-266 delays the Electric Utility Restructuring Act for five or six years. This would simultaneously delay the effective date of this bill through the action of Section 18, Contingent Effective Date. The Department’s TAA technical corrections bill, HB-252, amends section 7-1-8 NMSA 1978, as does this bill.  SB-266 also amends Section 62-3A-18 NMSA 1978 to alter some dates and responsibilities. This bill amends Section 62-3A-18 NMSA in a relatively minor way.

DESCRIPTION: This bill responds to concerns that electric utility restructuring might have negative impact on state and local gross receipts tax collections. The basic mechanism for addressing these concerns is to convert the taxation of electrical power in the state from a gross receipts tax imposed for business privilege to a sales tax imposed directly on consumers of electrical power. Under the new formulation, the customers are liable for the tax, and the generating, marketing and distribution elements of the industry are reduced to agents for the collection of the new sales tax. A deduction from gross receipts is proposed, to prevent taxation under the gross receipts and compensating tax act in addition to the tax imposed by the new law. The rate of electricity sales tax imposed at any meter location is made equivalent to the combined state, city and county gross receipts rate in effect at that location. This choice, by design, is intended to hold both the state and local governments harmless to the vast changes in the industry anticipated as dereg and restructuring move forward. The new act parallels virtually all the provisions of the Gross Receipts and Compensating Tax Act. For example, section 6 of the bill provides exemptions from the tax for electricity sold to the state or local governments, the United States, Indian Nations, tribes or pueblos, or to 501(c)(3) organizations. As another example, no tax is due on electricity sold for resale and purchases of electricity by generation and transmission cooperatives and similar entities are presumed to be purchases for resale. No nontaxable transaction certificate is required. Section 7 also provides a “compensating tax” feature similar to that of the GR&CTA. An innovative feature of the bill is the optional bypass feature. Large energy users may remit tax directly to the Department, instead of remitting the tax to the power company. Denial of a direct pay permit is a protestable issue. To forestall manipulation or evasion, partial payments of electricity and tax will be apportioned into a prorata payment for electricity and a prorata payment of tax. In the distribution section of the bill, the cities receive their local option tax and a 1.225% share of state tax in virtually identical fashion to that of the GR&CTA. The county and municipal government’s worries about loss of franchise tax revenue are addressed in Section 17 of the bill.  

The SFC amendments address some technical issues noted earlier and track changes in Section 7-1-8 NMSA 1978 with other bills.  

EFFECTIVE DATE: effective when electric utility deregulation becomes effective.

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 GRT/EST	
	0	0	Recurring	Local Governments GRT/EST	
	0?*	0?*	Recurring	Local Government (Franchise)	
 
*This assumes that section 17 of the bill satisfactorily protects local government franchise fees. 

ADMINISTRATIVE ISSUES:
With the combined rate of this tax equal to the combined rate of state and local GRT, this change is virtually transparent to all taxpayers. However, section 8 allows “large, nonresidential consumers” to pay the tax directly to the Department. This variant can also be easily dealt with. In either case, this tax cannot be administered without reprogramming the system to post a “commodity code”. This will be similar to the “T” or “S” codes used to distinguish variants in tax base and rates for interjurisdictional transportation and telecommunications. While not conceptually difficult, this addition to the new TRIMS/CRS system cannot be implemented until at least January 2002. 

OTHER IMPACTS AND ISSUES:
1.	TRD conducted a study of the vulnerability of local government franchise fees to electrical energy restructuring. The conclusion is that these about 2/3rd of these fees are vulnerable. The overall effect of  a loss of 2/3rd of franchise fees on electrical energy ranged from 0% of total current revenues for the dozen or so municipalities that do not impose any franchise fees to over 8% of current municipal general fund revenue in Las Vegas to almost 12% of current general fund revenue for Sunland Park. This study -- Impact of Electric Utility Restructuring on Municipal Franchise Fees, Taxation and Revenue Department Special Report, August 21, 1998 -- is available by request.

2.	This conversion of a portion of the gross receipts tax to a sales tax is reminiscent of the conversion for taxation of interstate telecommunications from the GR&CTA to the Interstate Telecommunications Gross Receipts Tax Act. This was done in 1992. Part of the desirability of this practice from the point of view of a regulated industry is that sales taxes, imposed directly on customers, are not in the rate base for regulatory purposes. Any changes in tax rates or administrative provisions are automatically and immediately implemented without regulatory approval or review. This interaction between taxes and regulation will probably also be true of the electric industry during the transition from regulated to unregulated markets. Of course, after full deregulation, there is no apparent advantage or disadvantage of this provision.