FISCAL NOTE TO
ASSEMBLY, No. 1138
STATE OF NEW JERSEY
DATED: May 30, 1996
Assembly Bill No. 1138 of 1996 provides a third option that a lessor of tangible personal property who purchased the property for lease may select in order to calculate the sales or compensating use tax due on that property. This third option would permit a lessor to pay the sales or compensating use tax to the State at the time each lease payment is received from the lessee of the property; the tax will be calculated on the amount of each lease payment as received by the lessor.
Currently, a lessor who buys property for lease must pay the sales or compensating use tax on the basis of either the purchase price of the property when purchased for lease or on the total of the lease payments attributable to a lease agreement when an agreement is signed. The lessor elects the basis.
Under the bill, the lessor will still be considered the user of the property and the payer of the sales or compensating use tax. A lessor of a motor vehicle, or boat or other vessel, will be excluded from this new payment option.
This bill, if enacted, will become effective on July 1, 1996, but this third tax payment option will be phased in over a period of time. On or after July 1, 1996, a lessor may select the third option if the total of the lease payments during the term of the lease agreement is $50,000 or less. On or after July 1, 1997, but before July 1, 1998, a lessor may select the third option if the total of the lease payments during the term of the lease agreement is $250,000 or less. Thereafter, the option will be available to all lessors.
The Department of Treasury estimates that the loss in revenue to the State upon the enactment of this bill will be approximately $1 million in Fiscal Year 1997, $4 million in Fiscal Year 1998, and $30 million to $35 million in Fiscal Year 1999. The department, however, cautions that precise information and numbers upon which a reliable estimate can be made are not available.
Based upon data within the Division of Taxation, the sales and compensating use tax paid on equipment leases in 1993 was between $43 million and $52 million. Assuming that the average lease is for a term of five years, that sales and compensating use taxes collected annually remain within the $43 million to $52 million range (no growth), and that all lessors will select for all leases the third option immediately after it becomes available, the department estimates the loss in revenues, without a phase-in, would range from approximately $35 million to $40 million the first full year after enactment, $25 million to $30 million the second year, $17 million to $21 million the third year, and $10 million the fourth year. The bill, however, does provide a phase-in over two fiscal years so that approximately 75 percent of the first year's revenue loss will be postponed until Fiscal Year 1999, according to the department. Again, the department estimates the losses with the phase-in will be approximately $1 million in Fiscal Year 1997, $4 million in Fiscal Year 1998, and approximately $30 million to $35 million in Fiscal Year 1999.
The department notes that to the extent that the average lease term is longer than five years, annual losses will be greater than the estimate; to the extent that the average lease term is less than five years, annual losses will be less than the estimate.
The department notes that these are maximum loss estimates given an assumed growth rate in the leasing industry of zero. (The department does note that the average net leasing portfolio, as measured by equipment cost, increased by 11.9 percent between 1993 and 1994 according to the Equipment Leasing Association of America's (ELA) Survey of Industry Activity and Business Operations. This indicates there was growth in the equipment leasing industry. The ELA is the association that represents equipment lessors who lease equipment in long-term transactions. ) If a positive growth rate is not factored into the estimate, annual losses may be underestimated.
In addition, the department's estimate assumes that all lessors will select the third payment option immediately after it becomes available; this probably would not be the case since selection of the option is at the discretion of the lessor on a per lease basis and this third option may not be the best choice for all lessors for all their leases. In conclusion, the department does state its assumptions on growth rate and lessor selections are "not necessarily accurate."
The Office of Legislative Services (OLS) cannot concur or object to this estimate because the OLS has not been provided with the data upon which this estimate is based. The OLS does not have access to other independent data specific to New Jersey upon which to compare or confirm the department's estimate.
The OLS notes that, while the department's estimate speaks in terms of an annual revenue loss, the "loss" is actually a deferral of the collection of the full amount of the tax due on a lease. Whereas, the tax is now paid in full in the year in which a lease is signed, the third option will permit incremental payments over the course of several years during which lease payments flow to the lessor. The "annual loss" is a loss in cash flow for the State; over the term of a lease, the full tax revenue will eventually be realized. However, a loss in cash flow in any year does translate into a loss in interest income; this actual loss cannot be calculated at this time. The OLS also notes that the reduction in annual revenue collections will be temporary and, depending on several factors, by seventh fiscal year the third option may be fully integrated as a choice for the leasing industry and the tax payments on all leases, regardless of the payment option, will become level for future years and revenue losses will no longer be a factor.
The OLS does concur in the department's assumption that equipment leases, on average, are for terms of five year. Informal information obtained from the ELA suggests that this average may be three years; however, a five-year term is not an unreasonable assumption. The OLS also concurs with the department's caution that not all lessors will select this third option immediately and for all their leases; consequently, estimated annual losses may be overstated.
The OLS believes that a growth rate should have been factored into the estimate. However, although the ELA survey cited above does provide some information on certain growth rates from 1993 to 1994, due to the lack of information specific to New Jersey on the value of leases and a breakdown of the different types of leases over a period of several years upon which sales and compensating use taxes have been paid in this State, OLS cannot offer an alternate calculation of annual revenue loss based on growth in the leasing industry. It can be safely assumed, however, that some growth has and will continue to occur; therefore, the department's annual loss estimate may be understated since growth is not included.
Finally, the OLS notes that, with regard to the phase-in, the ELA survey shows 36.9 percent of all equipment leasing transactions, by average dollar value of transactions in fiscal year 1994, were for $50,000 or below, and 64.9 percent were for $250,000 or below. It should be noted again that this information is not specific to New Jersey.
This fiscal note has been prepared pursuant to P.L.1980, c.67.