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F I S C A L I M P A C T R E P O R T

SPONSOR Silva

ORIGINAL DATE

LAST UPDATED

1/31/08

2/07/08 HB 445/aHBIC

SHORT TITLE Benefits Admin. Services Gross Receipts

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($20.7)

($29.8) Recurring General Fund

($37.8)

($79.3) Recurring

Local

Government

(Mesa del Sol

TIDD)

($21.3)

($33.6) Recurring

Local

Governments

(All Other)

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Health Policy Commission (HPC)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of HBIC Amendment

The House Business and Industry Committee amendment to House Bill 445 replaces the original

definition of “benefits administration services" that will be eligible for the proposed gross

receipts tax exemption. The original bill applied to receipts from human resources management

and customer support services, including providing investment account information, benefits

expertise, retirement planning, performance-improvement consulting, and workforce

administration. The amended definition will apply to receipts from providing human resources

outsourcing administration and services, including payroll, performance improvement

consulting, benefits expertise and comprehensive benefit management services.

House Bill 445/aHBIC – Page

2

Synopsis of Original Bill

House Bill 445 creates a gross receipts tax exemption for receipts from benefits administration

services provided by a business located in New Mexico if at least 95 percent of benefits

administration services performed in New Mexico are provided to clients located outside New

Mexico, and less than 5 percent of the total revenue of the business located in New Mexico is

attributable to clients in New Mexico.

The effective date of the proposed exemption is July 1, 2008.

FISCAL IMPLICATIONS

Based on tax return information, TRD estimates that taxpayers already located in New Mexico

that will be exempt due to the proposal paid about $86 thousand in gross receipts taxes in FY07.

Under the amended definition of “benefits administration services" provided in the bill, it is

assumed that 25 percent of this activity will be eligible for the proposed exemption. Receipts

from these businesses already located in New Mexico are expected to grow by 5 percent per

year.

Fidelity Investments recently announced it will locate a human resources center at Mesa del Sol

in Albuquerque. The company is expected to generate receipts of $125 million in FY09 while it

is still in the process of relocating and $262.5 million in FY10 once its operations are fully in

place. Based on the ratio of New Mexico’s population to that U.S. population, it is assumed that

99.4 percent of these receipts will be provided to clients outside of New Mexico, making them

eligible for an existing deduction provided in Section 7-9-57 NMSA 1978. The remaining 0.6

percent of receipts will total $816.4 thousand in FY09 and $1.7 million in FY11. Taxed at an

Albuquerque tax rate of 6.875 percent, the proposed exemption will decrease revenue from

Fidelity by an estimated $56.1 thousand in FY09 and $117.9 thousand in FY10. The exemption

is expected to grow by 5 percent per year. Because Fidelity is locating in the tax increment

finance district (TIDD) of Mesa del Sol, 75 percent of what would be the general fund revenue

loss and 67 percent of what would be the general fund revenue loss to the city of Albuquerque

will accrue to the TIDD.

The combined impacts of businesses already existing in New Mexico and Fidelity is expected to

be a gross receipts tax loss of $79.8 thousand in FY09 and $142.8 thousand in FY10. The table

on page one of this analysis illustrates how these revenue impacts will affect the general fund,

local governments, and Mesa del Sol TIDD.

SIGNIFICANT ISSUES

On January 17, 2008, New Mexico economic development officials announced plans for Fidelity

Investments to open a human resources services division at Mesa del Sol in Albuquerque. The

company will begin its expanded operations around the beginning of FY09. The proposed

exemption appears to be targeted to the receipts of this company.

LFC notes that while individual credits, deductions and exemptions from the gross receipts tax

may have small fiscal impacts, their cumulative effect significantly narrows the gross receipts tax

base. Narrowing the gross receipts tax base increases revenue volatility and requires a higher tax

rate to generate the same amount of revenue.

House Bill 445/aHBIC – Page

3

ADMINISTRATIVE IMPLICATIONS

The administrative impact on TRD will be minimal.

TECHNICAL ISSUES

LFC recommends amending the bill to make the proposed provision a deduction. Because

exemptions do not require a tax return to be submitted, they are much more difficult to audit. The

cost of exemptions is also virtually impossible to estimate.

TRD notes that Section 7-9-57 NMSA 1978 already contains a deduction for services performed

in New Mexico where initial use is out of state. The majority of receipts for businesses who

would qualify for the proposed exemption could already be deducted under current law.

SS/nt:bb