FISCAL NOTE

Date Requested: January 26, 2016
Time Requested: 10:48 AM
Agency: Tax Department, State
CBD Number: Version: Bill Number: Resolution Number:
1006 Introduced HB4232
CBD Subject: Taxation


FUND(S):

Priority Repairs Fund

Sources of Revenue:

Special Fund

Legislation creates:

A New Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The stated purpose of this bill is to raise the consumer use and sales tax [sic] by 1 cent per dollar, and dedicating those funds to the Priority Repairs Fund.
    
    Based on our interpretation, the temporary increase imposed by the proposed bill would affect only the consumers sales tax (excluding the use tax). If the proposed bill were amended to include an equal increase of the use tax by 1 percent, these changes would provide an additional $197 million in revenue in FY2017 and $215 million for each year thereafter. The additional revenue would be transferred to the Priority Repairs Fund. This additional 1 percent tax would end June 30, 2021. There would be no effect on the General Revenue Fund. These revenue estimates do not include approximately $5 million in annual revenues from the 1 percent increase that would accrue directly to the local districts imposing the Special District Excise Tax in lieu of the State sales and use tax.
    
    It should be noted that, as written, transfers to the Priority Repairs Fund appear to begin in July 2016 in the proposed bill. Sales and use tax collections for the month of July, the initial month of the increase, would not be received until August, thus complicating the determination of the amount to transfer and potentially placing a burden on the General Revenue Fund as these funds would be paid out before received. The impact of this burden is not included in the enclosed estimates.
    
    Administrative costs to the State Tax Department will be $10,800 for the remainder of FY2016 and $10,000 in FY2017 and each year thereafter.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2016
Increase/Decrease
(use"-")
2017
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 10,800 10,000 10,000
Personal Services 0 10,000 10,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 10,800 0 0
2. Estimated Total Revenues 0 197,000,000 215,000,000


Explanation of above estimates (including long-range effect):


    Based on our interpretation, the temporary increase imposed by the proposed bill would affect only the consumers sales tax (excluding the use tax). If the proposed bill were amended to include an equal increase of the use tax by 1 percent, these changes would provide an additional $197 million in revenue in FY2017 and $215 million for each year thereafter. The additional revenue would be transferred to the Priority Repairs Fund. This additional 1 percent tax would end June 30, 2021. There would be no effect on the General Revenue Fund. These revenue estimates do not include approximately $5 million in annual revenues from the 1 percent increase that would accrue directly to the local districts imposing the Special District Excise Tax in lieu of the State sales and use tax.
    
    It should be noted that, as written, transfers to the Priority Repairs Fund appear to begin in July 2016 in the proposed bill. Sales and use tax collections for the month of July, the initial month of the increase, would not be received until August, thus complicating the determination of the amount to transfer and potentially placing a burden on the General Revenue Fund as these funds would be paid out before received. The impact of this burden is not included in the enclosed estimates.
    
    Administrative costs to the State Tax Department will be $10,800 for the remainder of FY2016 and $10,000 in FY2017 and each year thereafter.
    



Memorandum


    The stated purpose of this bill is to raise the consumer use and sales tax [sic] by 1 cent per dollar, and dedicating those funds to the Priority Repairs Fund.
    
    The proposed bill has a title defect and raises Constitutional concerns. The title fails to mention the effective date of the increase and, while it does state that the increase lasts for five years, the title fails to mention that the increase expires on June 30, 2021. Despite the fact that the stated purpose of the bill is to raise the use and sales tax, the proposed bill does not raise the corresponding use tax under Article 15A. To avoid Constitutional concerns regarding the Dormant Commerce Clause, the use tax rate should be equal to the sales tax rate. Further, having a use tax at a different rate from the sales tax violates the Streamlined Sales Agreement, of which West Virginia is a member. Section 308 of that Agreement provides that a member state may not have multiple sales and use tax rates on items of personal property or services.
    
    The effective date of July 1, 2016 provides the Tax Department little time to circulate notice of the rate change or to make necessary changes to forms and programming software. Per West Virginia Code §11-15B-21(d), failure to provide at least 30 days between the enactment of the statute providing for a rate change and the effective date of the rate change may relieve a seller of liability for failing to collect tax at the new rate under certain circumstances.
    
    It is unclear how special district excise taxes (SDET) would be treated under the proposed bill. Per West Virginia Code §7-22-12(c) and §8-38-12(c), the rate of the SDET is identical to the rate of the consumer sales and service tax. When the SDET has been paid on any sale or service, that sale or service is exempt from the State consumer sales or service tax (West Virginia Code §11-15-9f). As written, it appears that this bill would increase the SDET to 7 percent, but, if so, then the 1 cent increase in those districts could not go to the Priority Road Fund as required by the bill.
    
    There are differences between current Code language (i.e., “at the rate of 6¢ on the dollar of sales or services”) and that of the proposed bill (i.e., “tax imposed by this article shall be 7¢ on the dollar of sales and services”). The new language fails to state that the tax is a rate of 7 cents. Also, the differences in terminology—“sales or services” vs. “sales and services”—may cause the amended language to be construed differently than before and could cause confusion.
    
    The effective and termination dates for the 1 cent increase could be confusing. The proposed bill provides that “[o]n July 1, 2016, the tax imposed by this article shall be 7¢” instead of stating the increase is effective “on and after” the specified date. Further, the bill states the “tax increase shall be in effect until June 30, 2021,” but it is unclear whether the tax will revert to the current rate of 6 cents on June 30, 2021 or July 1, 2021.
    
    The new section, West Virginia Code §17-3-11, provides that “[b]eginning on July 1, 2016, there shall be deposited into the Priority Repairs Fund 1¢ per dollar of the general consumer sales and service tax collected pursuant to section three, article fifteen, chapter eleven of this code.” This raises a number of concerns. For one, the 1 cent increase that is to be deposited into this Fund is different from the increased 1 cent on the dollar of sales and services being deposited into the account. Therefore, West Virginia Code §17-3-11 is inconsistent with the amended language found in West Virginia Code §11-15-3. Secondly, the bill does not address who makes the deposits into the Fund and how frequently these deposits will be made. The Tax Department would need a temporary holding account in order to determine the proper allocation of funds. If sales tax refunds need to be issued or errors corrected after the money has been deposited into the Priority Repairs Fund and spent by the Department of Highways, this could cause difficulties and may impose a burden on General Revenues. It would be helpful if this increase were placed in a clearing account and distributed on a periodic basis after sufficient time for corrections and refunds to have taken place.
    
    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov