Dog breeders are moving to NSW to evade stronger animal protection laws in other states, a parliamentary report on puppy farming warns.
Limits are needed on the number of dogs a breeder can have, the upper house committee examining the large-scale breeding of dogs and cats found.
It makes 18 recommendations for increasing protections to crack down on the unethical breeding of dogs and cats.
Committee chair Mick Veitch says there were more than 900 submissions to the inquiry and 6000 responses to an online questionnaire.
"There is no doubt that puppy and kitten farming at its worst is an abhorrent practice, with offenders largely operating underground," Mr Veitch said after releasing the report on Thursday.
The more dogs there were, the less likely it was that a breeder could guarantee their welfare, the report found.
It said ensuring the welfare of animals at industrial-scale breeding facilities would be impossible without imposing staffing ratios and socialisation requirements for the animals.
The report recommends the government introduce an extended liability scheme holding breeders responsible for congenital or genetic health issues arising in the first year of an animal's life.
Stricter laws introduced in Victoria and Western Australia, which are expected to be introduced in South Australia, had prompted larger breeders to relocate across the border, the inquiry heard.
"The policy landscape across Australia is changing, and NSW communities, especially border towns, are being affected," Mr Veitch said.
"The NSW government needs to act to address this impact, and to keep up with changed community expectations about animal welfare."
He said people wanted assurance that their pets had been ethically bred and well cared for before they brought them into their homes.
The committee was also concerned that people with animal cruelty convictions were able to continue breeding.
It said potentially illegal and complicated breeding arrangements, where people return their pet to breed or deliver a litter, was another area where laws needed to be tightened.
The inquiry was established in November to examine a bill from Animal Justice Party MP Emma Hurst seeking to tighten legal requirements for breeders.
Current laws were exposed as pathetic in the inquiry, and puppy farming needs to be outlawed, Ms Hurst said on Thursday.
"NSW is becoming an embarrassment,'' she said.
"If this government can't even enact laws to protect dogs from mass cruelty, then what hope do any other animals have?"
If her bill does not pass, the committee recommends the government urgently introduce its own legislation.
Greater guidance on breeding arrangements, limits on the number of animals a breeder can have and the litters they can deliver, and increased funding for animal welfare organisations are among the other recommendations.
One recommendation is for the fair trading minister to advocate to his federal counterparts for better regulation of the online sale of animals, and to call for a review of consumer law relating to buying animals.
AAP asked the Fair Trading Minister, Victor Dominello, to respond to the committee's report. A spokesperson said the department had made note of the report's release.
"NSW Fair Trading will closely study the recommendations in the report and continue to monitor the industry to ensure the laws are operating effectively and are fit for purpose," the spokesperson said.
The government has three months to respond to the report.
