February 12, 2020

Legislative Day #19

SB 70 – Drivers’ license in Spanish – Passes Senate floor votes with 24 voting Si.

A coalition that has grown to be “muy grande” successfully guided SB 70 to a vote of 24-Yes to 11-Nay by the entire Senate.  As proof that this idea is gaining acceptance, a similar bill passed the Senate last year garnering 19-yea votes. 

The prime sponsor of the bill Sen. V.J. Smith (R-Brookings) told about growing up in a community that spoke exclusively German.  Senator Rusch (R-Vermillion) read minutes from the state’s Constitutional Convention showing that a motion to print the new document in several languages so everyone could understand what was being discussed – passed.

Last year’s prime sponsor Sen. Nesiba (D-Sioux Falls - yes, THAT Senator Nesiba) told the Senate that South Dakota honors driver’s licenses issued by foreign countries and other states where people may have taken the written test in a language other than English.

The Senate was reminded that Spanish would be available and used only for publishing the manual and taking the test – the skills test would still be administered in English which matches the reality that many of the people looking for help with driver’s license already speak English but cannot read it well enough for the test.

Here is the Senate Floor vote on SB 70:

HB 1057 – Protecting Youth at Risk or

Prohibiting Certain Treatments of Transgender Youth.

After passing the House of Representatives with 46-Aye votes (out of a total of 70) HB 1057 was assigned to Senate Health and Human Services Committee in the Senate where it had a hearing on Monday morning. 

The bill was amended by the prime sponsor in the House Rep. Deutsch (R-Florence) to remove all criminal penalties that could be lodged against doctors or even parents of transgender youth.   This left the prohibitions against using hormone treatments such as puberty blockers or any surgery (which is not done in South Dakota) in the bill but left only civil remedies for any transgender people in the future. 

This set off an interesting but rather esoteric debate about just who could sue for what and when and if there was a statute of limitations.  There was a medical discussion that used ginormous words (this keyboard doesn’t have enough letters for most of them).

The South Dakota Chamber of Commerce and Industry -- along with the South Dakota Retailers Association and Sioux Falls Chamber plus others -- repeated warnings about unintended economic consequences of these types of bills.  As was the case in the House of Representatives, the hearing was conducted with proper decorum.

At the end of the hearing and all of the questions, the bill was “deferred to the 41^st legislative day” (about the same as being tabled) with a vote of 5-Yea to 2-Nay.

Special Report: Production Molds – Same Mold could owe $10 tax or $3,000 

Why it’s weird and why this is not the year to fix it.

Production molds are weird.  They are blocks of metal that give shape to parts.  They make parts that are inputs to larger machines or make something that is sold later to a customer.  A mold that is made by the manufacturer using it to make parts is taxed based on the scrap value of the material used to make that mold.  A mold with 100 pounds of steel might have a value of $100 and owe tax of $6.50.  Tax is the same, if the mold is “loaned” to the manufacturer to make parts.   If the mold is purchased, and they are expensive, for $50,000, the tax is based on the purchase price and would be $3,250.

Want a more detailed explanation of this situation?  Neither do most people.  But for readers who enjoy tax policy (a counselor may help) or those that are in this business, here is an analysis of this tax and how the situation might be resolved in the future.

Since molds are used as part of making products, and do not become part of the actual product to be sold later, they are subject to use tax in a similar manner as are drill bits, sandpaper, saw blades and welding supplies.  That said, there are variations in the methods used to determine the value of the molds for the purpose of applying the tax.  Those variations include the following.

Purchased Molds.  If the mold is purchased, the tax is applied to the value based on the purchase cost of the mold.  If a mold is manufactured in South Dakota and delivered to a casting business or final product manufacturer within South Dakota, the tax is properly to be collected and remitted by the business that made the mold as part of the transaction.  Should that mold be manufactured in another state and delivered within South Dakota, the mold is subject to use tax and paid by the purchasing business based on the receipt that reflects the amount of the purchase.

Self Made Molds.  If a mold is produced by a South Dakota casting business for use within that casting business, then the mold is valued at the value of the material used to make the mold (e.g., steel, aluminum, titanium, tree bark); assuming that the materials have not previously been taxed. 

Now for the tricky part; if the mold is not purchased nor produced by the casting business but is sent to the casting business along with an order to make a certain number of parts, and then to be returned to the business that sent it with the order for the parts, the value is the same as if the mold was produced by the casting business.  The value for tax calculations is the cost of the material used to make the mold itself. 

The Useful Life Problem.  Determining the value of a mold is problematic given the length of time they are useful and the common practice of sending them to multiple casting businesses when ordering a set number of the parts produced by the given mold.  Valuing a million dollar mold that is only used for a short time by a South Dakota manufacturer would result in a tax bill that would far exceed the value of the contract for a given run of parts, and, therefore, eliminate South Dakota manufacturers from being able to bid for those contracts.  Solving this dilemma is how the value of “loaned molds” was set at scrap value.  (The plot thickens.)

To state clearly the inequity of the current policy, if the mold above is purchased by a final product manufacturer in South Dakota, it would result in an additional cost of 4.5% or even 6.5% ($45,000 - $65,000).  This tax would either be collected by the business that produced the mold as part of the purchase (if the mold producer is located in South Dakota) or would be collected from the business purchasing the mold in the form of use tax based on the receipt from the purchase.

Decision Point.  The Chamber wonders why valuing all production molds using the value of the material of the mold wouldn’t make for a more understandable and equitable tax policy.  It would remove a competitive disadvantage faced by South Dakota manufacturers AND South Dakota businesses that produce molds.

The main sticking point is that it will reduce revenue to the state during a budget cycle that can hardly take a significant gouge out of any revenue.  This brings up the question of exactly how much revenue is collected from the sales and use tax of molds by businesses that actually purchase or sell them.

To fix this tax inequity will require passing a law that will first exempt production molds from the sales tax and add them to the use tax statute.  Any bill that exempts anything from the sales tax this year will be greeted like a skunk at a wedding.  This tax needs to change – making that case begins with this report.  Actually trying to pass the needed changes in law must wait until the next session.