FISCAL NOTE
Date Requested: February 29, 2016
Time Requested: 09:32 AM |
| Agency: |
Tax Department, State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2929 |
Comm. Sub. |
HB2704 |
|
|---|
| CBD Subject: |
|
|---|
|
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Neither Program nor Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The purpose of this bill is to reduce the consumer sales and use taxes incrementally until 2020 and eliminates exemptions.
The proposed legislation would reduce the general consumer sales and use tax rate from 6.0% to 5.5% effective January 1, 2017. In addition, the provisions of the bill eliminate the professional service exemption for some, but not all, professional services, extend the sales tax to contracting services, tax the full value of mobile home and modular home sales, tax sales of high technology business services to certain high technology businesses with government contracts, tax direct use purchases by certain high technology businesses, tax membership fees for certain types of health fitness organizations, impose tax on business to business incentive payments for retail merchandizing, impose tax on digital goods and impose tax on some advertising services and advertising space. The bill would subsequently lower the general consumer sales tax rate from 5.5% to 5.25% in 2018, to 5.0% in 2019 and to 4.75% in 2020 only if the combined balance in the State’s Revenue Shortfall Reserve Funds equal or exceed fifteen percent of the General Revenue Fund budgeted for the fiscal year commencing July 1st of the preceding year.
Under the provisions of this bill, West Virginia would become the first State with a consumer sales and use tax imposed on the consumer to attempt to tax professional services. Other states taxing one or more professional services (i.e., Hawaii, New Mexico, Ohio, South Dakota and Washington) impose a gross sales tax or business and occupation type tax on vendor gross sales associated with such services. In West Virginia, professional services are currently taxed under municipal business and occupation taxes. In addition to economic leakages discussed below, there would be several other revenue leakages associated with taxation of professional services due to other overlapping sales tax exemptions in the Code, including exemptions for purchases by government organizations, schools, churches and other tax exempt organizations and direct use tax exemptions for various business groups. The proposed sales tax would apply to lawyers, certified public accountants, public accountants, architects, professional engineers and veterinarians. The proposed language is silent with regard to services provided by paralegals or non-professional staff within a law firm. In the case of accountants, the exemption would appear to end for such services unless they were provided by enrolled agents who would remain exempt from tax. A significant share of services provided by these professionals, with the exception of veterinarians, would involve business to business transactions as opposed to business to consumer transactions. Some businesses would be able to escape taxation by either internalizing their service needs or by out-sourcing such needs in a manner that effectively circumvents the nexus requirements for such activity to be taxed in West Virginia.
We are unable to provide an accurate estimate of financial impact on the provisions of this bill without making numerous assumptions concerning intent. Some of these assumptions follow below:
• We assume that the intent of the bill is to tax consumption activity once to avoid tax pyramiding that is often associated with business gross receipt taxes, but not with traditional sales taxes. Contractors currently pay sales tax on all of their purchases. Under the proposed bill, we assume that purchases for incorporation in a real property contract would be subject to the sales for resale exemption and tax would apply to the final contract price. For example, if a contractor builds a house, all material purchases for the house would be exempt from tax as sales for resale, but the final sales price of the home would be subject to the state sales tax.
• The tax on professional services would extend to all services provided by firms engaged in the general activity subject to taxation (e.g., a law firm would not be able to segregate paralegal service receipts from legal service receipts). Most law firms are organized as limited liability companies or limited partnerships as opposed to corporations.
• The advertising sales tax would be limited to activity performed in West Virginia under existing destination sourcing rules (e.g., advertising purchased by West Virginia companies for use in West Virginia).
• The advertising sales tax would extend to mediums beyond those listed in the proposed bill such as magazines and Internet.
• The tax on memberships or services provided by health and fitness organizations relating to personalized fitness programs would only apply to for profit organizations given that not-for-profit organizations providing similar services are exempt elsewhere in current Law.
• The proposed tax on “electronically transferred goods” refers to digital goods (i.e., books, videos, and music) as defined in the Streamlined Sales Tax Agreement.
• The intent is to tax mobile homes at 5.5% of the full purchase price as opposed to 5.5% of 50% of the purchase price effective January 1, 2017 with proposed future tax rates also applying to the full sales price.
Based on these assumptions, net General Revenue Fund collections would initially increase by up to $25.0 million in FY2017. During the first full year of effect, collections would increase by up to $52.5 million as $160.0 million from the expansion of the tax base is offset by a $107.5 million decrease associated with the rate decrease to 5.5 percent. The net gain would be eliminated and possibly reversed by the second full year under the assumption that the sales tax rate would fall again to 5.25 percent. Revenue would subsequently decrease by $55 million per year for each tax rate decrease of .25 percent implemented on or after January 1, 2019. Upon full implementation, annual revenues would be $110.0 million less per year than under current law.
Administrative costs to the Tax Department will be $89,000 in the current fiscal year and $99,000 in 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 |
89,000 |
99,000 |
99,000 |
| Personal Services |
75,000 |
75,000 |
75,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
14,000 |
24,000 |
24,000 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
The proposed legislation would reduce the general consumer sales and use tax rate from 6.0% to 5.5% effective January 1, 2017. In addition, the provisions of the bill eliminate the professional service exemption for some, but not all, professional services, extend the sales tax to contracting services, tax the full value of mobile home and modular home sales, tax sales of high technology business services to certain high technology businesses with government contracts, tax direct use purchases by certain high technology businesses, tax membership fees for certain types of health fitness organizations, impose tax on business to business incentive payments for retail merchandizing, impose tax on digital goods and impose tax on some advertising services and advertising space. The bill would subsequently lower the general consumer sales tax rate from 5.5% to 5.25% in 2018, to 5.0% in 2019 and to 4.75% in 2020 only if the combined balance in the State’s Revenue Shortfall Reserve Funds equal or exceed fifteen percent of the General Revenue Fund budgeted for the fiscal year commencing July 1st of the preceding year.
Under the provisions of this bill, West Virginia would become the first State with a consumer sales and use tax imposed on the consumer to attempt to tax professional services. Other states taxing one or more professional services (i.e., Hawaii, New Mexico, Ohio, South Dakota and Washington) impose a gross sales tax or business and occupation type tax on vendor gross sales associated with such services. In West Virginia, professional services are currently taxed under municipal business and occupation taxes. In addition to economic leakages discussed below, there would be several other revenue leakages associated with taxation of professional services due to other overlapping sales tax exemptions in the Code, including exemptions for purchases by government organizations, schools, churches and other tax exempt organizations and direct use tax exemptions for various business groups. The proposed sales tax would apply to lawyers, certified public accountants, public accountants, architects, professional engineers and veterinarians. The proposed language is silent with regard to services provided by paralegals or non-professional staff within a law firm. In the case of accountants, the exemption would appear to end for such services unless they were provided by enrolled agents who would remain exempt from tax. A significant share of services provided by these professionals, with the exception of veterinarians, would involve business to business transactions as opposed to business to consumer transactions. Some businesses would be able to escape taxation by either internalizing their service needs or by out-sourcing such needs in a manner that effectively circumvents the nexus requirements for such activity to be taxed in West Virginia.
We are unable to provide an accurate estimate of financial impact on the provisions of this bill without making numerous assumptions concerning intent. Some of these assumptions follow below:
• We assume that the intent of the bill is to tax consumption activity once to avoid tax pyramiding that is often associated with business gross receipt taxes, but not with traditional sales taxes. Contractors currently pay sales tax on all of their purchases. Under the proposed bill, we assume that purchases for incorporation in a real property contract would be subject to the sales for resale exemption and tax would apply to the final contract price. For example, if a contractor builds a house, all material purchases for the house would be exempt from tax as sales for resale, but the final sales price of the home would be subject to the state sales tax.
• The tax on professional services would extend to all services provided by firms engaged in the general activity subject to taxation (e.g., a law firm would not be able to segregate paralegal service receipts from legal service receipts). Most law firms are organized as limited liability companies or limited partnerships as opposed to corporations.
• The advertising sales tax would be limited to activity performed in West Virginia under existing destination sourcing rules (e.g., advertising purchased by West Virginia companies for use in West Virginia).
• The advertising sales tax would extend to mediums beyond those listed in the proposed bill such as magazines and Internet.
• The tax on memberships or services provided by health and fitness organizations relating to personalized fitness programs would only apply to for profit organizations given that not-for-profit organizations providing similar services are exempt elsewhere in current Law.
• The proposed tax on “electronically transferred goods” refers to digital goods (i.e., books, videos, and music) as defined in the Streamlined Sales Tax Agreement.
• The intent is to tax mobile homes at 5.5% of the full purchase price as opposed to 5.5% of 50% of the purchase price effective January 1, 2017 with proposed future tax rates also applying to the full sales price.
Based on these assumptions, net General Revenue Fund collections would initially increase by up to $25.0 million in FY2017. During the first full year of effect, collections would increase by up to $52.5 million as $160.0 million from the expansion of the tax base is offset by a $107.5 million decrease associated with the rate decrease to 5.5 percent. The net gain would be eliminated and possibly reversed by the second full year under the assumption that the sales tax rate would fall again to 5.25 percent. Revenue would subsequently decrease by $55 million per year for each tax rate decrease of .25 percent implemented on or after January 1, 2019. Upon full implementation, annual revenues would be $110.0 million less per year than under current law.
Administrative costs to the Tax Department will be $89,000 in the current fiscal year and $99,000 in each year thereafter.
Memorandum
The purpose of this bill is to reduce the consumer sales and use taxes incrementally until 2020 and eliminates exemptions.
There is no statement as to who states that the Rainy Day Fund requirements have been met or what items are considered in determining the ratio. There are no provisions to move the tax rate back up in years that the Rainy Day Fund requirements are not met. When the targets are not met, it is unclear that multiple rate reductions would not be immediately effective.
One consideration in taxing professional services of lawyers would involve the confidentiality of the client matters and how an audit would be conducted.
The rate of special district excise taxes must match the sales tax rate. This will cause significant revenue problems for special districts, particularly those districts with a significant base amount already determined. There is no provision in the bill to refigure the bases of the special districts.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov