FISCAL NOTE

Date Requested: April 05, 2017
Time Requested: 12:07 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2649 Amendment SB484
CBD Subject: Governor -- Bills Requested By


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 Service Tax and Use Tax rate and to broaden the sales tax base by repealing certain exemptions effective either July 1, 2017 or October 1, 2017. According to our interpretation, the proposed bill would repeal certain exemptions currently in place in Code and decrease the sales tax rate. Certain exemptions would be taxable effective July 1, 2017, including (1) personal services such as hair, skin, nail, and non-medical personal care; (2) telecommunication services; and (3) contracting services (for the first $40,000 of contracting services). Other exemptions would be taxable effective October 1, 2017, including (1) direct use of transportation (excluding coal transportation) and communications; (2) electronic data processing; (3) health and fitness memberships; and (4) primary opinion research. The exemption for construction and maintenance materials that currently results in an annual revenue transfer from the General Revenue Fund to the State Road Fund would be repealed effective May 1, 2017. The rate for all goods and services subject to the sales tax would decrease to 5.5 percent on July 1, 2018 and to 5.25 percent on July 1, 2019. Thereafter, the proposed bill would reduce the sales tax rate by 0.25 percentage points on January 1 of any given year when certain conditions are met as of the end of the prior fiscal year. The rate could not be reduced below 4.75 percent and could not be reduced after January 1, 2029. Considering available data and anticipated economic conditions, we do not anticipate the rate to fall below 5.25 percent through January 2022. Based on our understanding, the proposed changes are expected to increase General Revenue Fund collections by an estimated $144 million in FY2018 and $64 million in FY2019. Beginning in FY2020, proposed changes are expected to be effectively revenue neutral relative to current Law absent any proposed revenue enhancements to close the current budget gap. These estimates consider revenue gains associated with base-broadening enhancements as well as revenue losses associated with the overall decline in the sales tax rate. These figures may not fully reflect the behavioral impact associated with these changes, particularly in the first year of revenues. Most of this behavioral effect is expected to be associated with the repeal of direct use exemptions, where individuals may accelerate purchases prior to the new tax being levied. The extent to which this may occur is not measured in this analysis, but substantial acceleration of purchases may affect anticipated revenues in the first year. These figures exclude sales tax collections diverted to municipal governments that impose a local sales tax and the Sales Tax Increment Financing (STIF) Districts. The proposed bill is expected to increase cumulative municipal sales tax collections by up to $6 million per year due to the broadened tax base for the 28 municipalities that currently impose a local tax. An additional 11 municipalities are slated to begin imposing a local sales tax on July 1, 2017. The STIF Districts would realize a small increase in collections as a result of the broadened base. When the scheduled sales tax rate reductions are implemented, collections in these Districts would experience a slight decrease relative to current Law. The proposed bill is unclear regarding the pyramiding of sales tax on contracting services and contracting material purchases. If the intent is to allow pyramiding of tax paid on material purchases (i.e., the contractor’s purchases of materials would remain taxable), then a net revenue increase would result from the elimination of the contracting services exemption. This is the presumed intent incorporated into this analysis. If, however, the intent is to disallow pyramiding (i.e., to exempt material purchases by contractors as, for example, a sale for resale exemption), then the net result could be a loss of tax revenue in comparison to current Law. The size of such loss is not readily quantifiable and is not incorporated in this analysis. The application of the tax to the first $40,000 of a contract would be complex to administer, with possible alternative interpretations of proper tax base associated with the definition of a contract. Further, administration of the repeal of direct use exemptions that maintain an exemption for coal transportation would be complex. In instances where non-coal products are transported along with coal, portioning costs between those that would be taxable and those that would not be taxable would be problematic. The bill is silent as to how these costs should be apportioned and separated. Additional administrative costs incurred by the State Tax Department would be $12,000 in FY2017, $47,000 in FY2018, and $40,000 for each year thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2017
Increase/Decrease
(use"-")
2018
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 12,000 47,000 40,000
Personal Services 2,000 35,000 35,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 2,000 0
Other 10,000 10,000 5,000
2. Estimated Total Revenues 0 144,000,000 0


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


According to our interpretation, the proposed bill would repeal certain exemptions currently in place in Code and decrease the sales tax rate. Certain exemptions would be taxable effective July 1, 2017, including (1) personal services such as hair, skin, nail, and non-medical personal care; (2) telecommunication services; and (3) contracting services (for the first $40,000 of contracting services). Other exemptions would be taxable effective October 1, 2017, including (1) direct use of transportation (excluding coal transportation) and communications; (2) electronic data processing; (3) health and fitness memberships; and (4) primary opinion research. The exemption for construction and maintenance materials that currently results in an annual revenue transfer from the General Revenue Fund to the State Road Fund would be repealed effective May 1, 2017. The rate for all goods and services subject to the sales tax would decrease to 5.5 percent on July 1, 2018 and to 5.25 percent on July 1, 2019. Thereafter, the proposed bill would reduce the sales tax rate by 0.25 percentage points on January 1 of any given year when certain conditions are met as of the end of the prior fiscal year. The rate could not be reduced below 4.75 percent and could not be reduced after January 1, 2029. Considering available data and anticipated economic conditions, we do not anticipate the rate to fall below 5.25 percent through January 2022. Based on our understanding, the proposed changes are expected to increase General Revenue Fund collections by an estimated $144 million in FY2018 and $64 million in FY2019. Beginning in FY2020, proposed changes are expected to be effectively revenue neutral relative to current Law absent any proposed revenue enhancements to close the current budget gap. These estimates consider revenue gains associated with base-broadening enhancements as well as revenue losses associated with the overall decline in the sales tax rate. These figures may not fully reflect the behavioral impact associated with these changes, particularly in the first year of revenues. Most of this behavioral effect is expected to be associated with the repeal of direct use exemptions, where individuals may accelerate purchases prior to the new tax being levied. The extent to which this may occur is not measured in this analysis, but substantial acceleration of purchases may affect anticipated revenues in the first year. These figures exclude sales tax collections diverted to municipal governments that impose a local sales tax and the Sales Tax Increment Financing (STIF) Districts. The proposed bill is expected to increase cumulative municipal sales tax collections by up to $6 million per year due to the broadened tax base for the 28 municipalities that currently impose a local tax. An additional 11 municipalities are slated to begin imposing a local sales tax on July 1, 2017. The STIF Districts would realize a small increase in collections as a result of the broadened base. When the scheduled sales tax rate reductions are implemented, collections in these Districts would experience a slight decrease relative to current Law. The proposed bill is unclear regarding the pyramiding of sales tax on contracting services and contracting material purchases. If the intent is to allow pyramiding of tax paid on material purchases (i.e., the contractor’s purchases of materials would remain taxable), then a net revenue increase would result from the elimination of the contracting services exemption. This is the presumed intent incorporated into this analysis. If, however, the intent is to disallow pyramiding (i.e., to exempt material purchases by contractors as, for example, a sale for resale exemption), then the net result could be a loss of tax revenue in comparison to current Law. The size of such loss is not readily quantifiable and is not incorporated in this analysis. The application of the tax to the first $40,000 of a contract would be complex to administer, with possible alternative interpretations of proper tax base associated with the definition of a contract. Further, administration of the repeal of direct use exemptions that maintain an exemption for coal transportation would be complex. In instances where non-coal products are transported along with coal, portioning costs between those that would be taxable and those that would not be taxable would be problematic. The bill is silent as to how these costs should be apportioned and separated. Additional administrative costs incurred by the State Tax Department would be $12,000 in FY2017, $47,000 in FY2018, and $40,000 for each year thereafter.



Memorandum


The purpose of this bill is to reduce the Consumer Sales and Service Tax and Use Tax rate and to broaden the sales tax base by repealing certain exemptions effective either July 1, 2017 or October 1, 2017. As written, it appears materials purchased for use for the first $40,000 of contracting services become exempt due to being directly used. However, this is not explicitly stated. The proposed bill references “…the first $40,000 of consideration paid for contracting services pursuant to a contract…” but it is unclear whether this applies to only one contract, for a taxable year or other period, or if the contractor could issue several contracts for the same projects to gain a tax benefit.



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