BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 17, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB-637

SPONSOR: Senator Rawson

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

CONFLICTS, DUPLICATES, COMPANIONS: HB-743 proposes similar measures to address the recently-surfaced inequity caused when governmental units abuse the right to issue NTTCs. HB-743 reinstates an old avoidance behavior of government entities. This bill simply adjusts the definition of construction material somewhat more favorably for government entities and non-profits. Both bills create a “safe harbor” for sellers who accept NTTCs in good faith from governments and non-profits. HB-743 also 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 provides a “safe-harbor” if a seller accepts an NTTC in good faith, accompanied by an written statement from a government or non-profit promising that the material will not be used in a construction project.

EFFECTIVE DATE: not stated – 90 days after adjournment (June 17).

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 or replacement 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 may claim the safe harbor.

2.	For orderly transition, the Department requests a July 1, 2001 effective date. Most other changes in gross receipts are generally effective January 1 or July 1. Although there is no accounting or processing impact on the difference between a June 17 and July 1 effective date, this difference will be confusing to taxpayer and auditor alike.
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 clever 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 solves a portion of the problem, but does not exert any pressure to punish government misfeasance. The Department suggests including a provision (see HB-180) that would punish a governmental unit for issuing a type 9 NTTC inappropriately by having its ability to issue any NTTC, for any purpose, revoked for one year. 

3.	In the future, pursuant to this bill, the parts for a simple repair of a faucet will be deductible, as will the replacement of a broken fixture with one of comparable quality. The Department will regulate this new bright line.

4.	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.