October 1, 2014
By Chris Sieroty
Nevada is well known as a corporate tax haven, one reason is that Nevada law provides strong protections against holding corporation’s owners.Nevada is well known as a corporate tax haven. Many large companies are incorporated in Nevada, particularly those whose headquarters are located in California, Arizona or Utah. There are several reasons for this. One is that Nevada law provides strong protections against holding corporation’s owners responsible for the actions of a corporation.
Another reason has to do with the state’s tax structure which is favorable for businesses in Nevada. The state also has no corporate income tax or personal income tax. In fact, it’s clear that the state has made it a priority to keep the cost of doing business in Nevada as low as possible.
However, there are some fees businesses must pay in Nevada. One is an annual $200 “Business License Fee,” which is paid to the Secretary of State’s Office at the time of formation or renewal of the corporation. Nevada also applies a 1.17 percent tax on gross wages to most businesses with a payroll over $85,000. The quarterly tax, however, does allow employers to deduct health care expenses. If an employer has less than $85,000 of taxable wages in a quarter, it still must file a return with $0 balance due, according to the state Department of Taxation.
Financial institutions in Nevada also pay 2 percent of wages paid to employees during a calendar quarter. However, Nevada and Texas are the only two states that do not have information sharing agreements with the Internal Revenue Service.
For many businesses this means that Nevada is an ideal location. Liz Malm, an economist with the Center for State Fiscal Policy with the Tax Foundation in Washington, D.C., said the state does really well as a whole where it currently stands.
“Each year, we rank state business tax climates in our State Business Tax Climate Index,” Malm said. “Nevada ranks third, meaning that it has the third best tax climate in the country. This is in part due to its lack of income taxes.”
Malm cautioned that Nevada does have a high state-level sales tax rate and high average local rates, but property taxes are in the middle-of-the-pack. She added Nevada does have an interesting state-level payroll tax, and uses severance taxes on mineral extraction, as well. A severance tax is incurred when non-renewable natural resources are extracted within a taxing jurisdiction.
“Tax revenues associated with tourism, such as sales taxes and hotel accommodation taxes, are also important for the state,” Malm said.
Nevada’s budget is also reliant on taxes levied on the mining industry. The state has a minerals extraction tax and oil and conservation tax, known as the Net Proceeds of Mines Tax. The tax’s rate was 3.65 percent before being raised in 1989 to its current 5 percent.
The state’s tax structure could change on November 4th of this year, when Nevada voters will decide on two tax proposals that the Tax Foundation says will have a dramatic impact on the state.
The Nevada Mining Tax Cap Amendment, also known as SJR 15, is on the ballot as a legislatively-referred constitutional amendment. If approved by voters, the repeal would allow the 2015 Legislature to consider raising the 5 percent tax on net proceeds of gold and other minerals mined in Nevada.
The cap is currently in the state constitution and needs voter approval to be removed. A similar measure failed to make the 2012 ballot.
The campaign surrounding the attempted removal of the 5 percent tax cap on mining in Nevada, although controversial, has been overshadowed by another ballot issue, Question 3, also known as The Nevada Margin Tax for Public Schools Initiative. If approved by voters, the initiative would institute a 2 percent margin tax on businesses operating in Nevada. Tax revenue raised from the increase would be kept in the State Distributive School Account to be allocated to public schools, from kindergarten through high school. However, its possible regular funding will be pulled so there’s no guarantee that education funding will increase.
The 2 percent tax could be determined using two different methods: Taxation of 70 percent of total revenue of the business or taxation of a business’ total revenue minus compensation to owners and employers related to good sold. A business would choose whether to subtract compensation or cost of goods, but not both.
The measure would also temporarily increase the 2 percent Modified Business Tax on financial institutions to 2.29 percent in January and with another temporary increase to 2.42 percent set for July of next year. The increased tax revenue would be used to pay for the administration of the margins tax and would return back to 2 percent in July of 2016.
If approved by voters, the tax would start to accrue on January 1, 2015.
The initiative was filed in February 2013 by the Nevada AFL-CIO, led by Executive Secretary Treasurer Danny Thompson, and the Nevada State Education Association (NSEA). However, on May 2, 2013, the AFL-CIO passed a resolution to officially oppose the measure. It is still being supported by the Nevada State Education Association. Supporters refer to the measure as The Education Initiative (TEI) while opponents have dubbed it The Margin Tax Initiative.
“In terms of how it will impact business, experience from Texas – the tax that the Nevada proposal mimics – shows us that this is not a business-friendly tax,” Malm said. “It’s complicated and cumbersome to calculate and comply with; it will hit small and low margin businesses even though these aren’t its direct targets.”
Malm expects it would be costly for Nevada to administer and is confusing and hard to understand.
“It’s also not neutral, hitting different industries with different effective tax rates,” Malm said, “Overall, it’s a poorly designed tax.”
In 2006, Texas implemented a margin tax, which supporters of the Nevada tax have used as a model in crafting the tax which is on the November ballot. The tax in Texas went into effect in 2008, despite much resistance from small business owners.
Texas officials anticipated the tax would raise $5.9 billion per year. However, in recent years the tax fell short, raising only $3.9 billion.
Texas’ tax levies 1 percent on most companies that make at least $1 million in annual revenue and 0.5 percent on wholesalers. This isn’t a new tax for Texas, simply a revised tax. Previously, businesses weren’t required to pay the original tax if they were incorporated in another state. In 2013, several Texas legislators tried, but failed the repeal the tax.
Nevada’s Margin Tax
Nevada’s proposed margin tax – the state’s first such broad-based business tax – would impose 2 percent on all businesses making more than $1 million in annual revenue, whether or not the company is profitable. Supporters say the tax is designed to raise almost $800 million a year for public schools.
Dan Hart, campaign manager for The Education Initiative, was unavailable for comment. However, on the organization’s website he said the margin tax is needed to offset some $700 million in cuts to education since 2009.
Supporters of the tax also point to Nevada being ranked 49th in the U.S. in per pupil spending, the state having the lowest corporate taxes in the country, and contend that 87 percent of Nevada businesses would be unaffected by TEI.
“It’s a deeply flawed tax,” said Karen Griffin, a spokeswoman for the Coalition to Defeat the Margin Tax Initiative. “It will hurt small and mid-sized businesses and will increase employer costs. As a result, we are opposed to the measure.”
Griffin said the tax ultimately does nothing to fund education and doesn’t guarantee the money raised will be used to fund education in Nevada. She predicted a large number of lawsuits would be filed if voters approved the margin tax.
In fact, opponents of the tax have speculated that the primary reason the NSEA did not include language in its petition earmarking the tax for public education is it would have been questioned by Nevada courts. In recent years, initiative petitions have been challenged for breaking the “single subject rule.” In other words, by Nevada law, the initiative cannot call for the imposition of the tax and then also prescribe how the money will be spent.
Griffin said in 2008 voters in Washoe and Clark counties approved a 3-percentage point increase in room taxes for education, including increasing teacher salaries and improving school performance. After approval in Washoe and Clark counties, the 2009 Legislature increased the room tax.
However, instead of using the tax profits to increase education funding, state lawmakers used the revenue to plug its budget shortfalls in its general fund. That tax increase raised some $230 million in its first two years.
Referring to the margin tax, Griffin reiterated that “it’s a 2 percent across the board tax. There are no tax exemptions for Medicare, so it would tax those payments and providers. We think when people understand it doesn’t do what the initiative claims, ultimately they will vote no.”
Griffin added that the margin tax “would kill thousands of jobs” in Nevada.
Taxes into 2015
Meanwhile, the 2015 legislative session may still be five months away, but a list of bill draft requests has been released and it offers a glimpse into some of the tax measures state lawmakers want to consider during their 120 days in Carson City.
Both of the tax-related draft requests are causing voters to sit up and take notice. Sen. Tick Segerblom, D-Las Vegas, has requested drafting a resolution asking voters in 2018 to repeal the two-thirds requirement in the Legislature to raise taxes.
And, at the close of the 2013 session, Sen. Mo Dennis, D-Las Vegas, asked the next session to draft a resolution that would create a Nevada Commerce Tax. Specific details on what that tax would look like haven’t yet been released.
“I don’t have a crystal ball about what will happen in the next legislative session. I wish I did,” said Carole Vilardo, president of the Nevada Taxpayers Association. “I believe whether or not the margin tax passes … substantial changes could be made to better reflect the way business is done.”
Vilardo highlighted the proposed Nevada Commerce Tax, which she said had been “discussed as an income tax.” But in a six-page section titled 2015 Session: The Crystal Ball, Vilardo said the extent of the discussion on revenue issues will largely be determined by increases in expenditures in the current biennium that were not covered by the revenue estimates from the Economic Forum in May 2013 and used by the Legislature in closing the budgets for fiscal years 2014 and 2015.
Nevada Sunsets, Not Those Ones…
Vilardo also pointed to increases in state expenditures, or Sunsets, the taxes or fees that are due to expire, and the state of the economy.
“We’ll find out two weeks before the start of the session if Governor Brian Sandoval extends the Sunsets,” Vilardo said.
The Sunsets that are set to expire are: the Modified Business Tax that will revert from 1.17 percent to 0.63 percent; the sales tax (Local School Support Portion) was increased 0.30 percent to 2.60 percent; the room tax, what is known as the 3 percent initiative portion of the tax collected only in Clark and Washoe counties and is currently deposited into the general fund; the Motor Vehicle Registration Tax, which was increased 10 percent each year of the depreciation schedule and the Net Proceeds of Minerals Tax, or advanced payment of the tax.
The Modified Business Tax, sales tax and room tax are scheduled to sunset on June 30, 2015. The 10 percent increase in the Motor Vehicle Registration Tax has been deposited into the general fund, but on July 1, 2015 the revenue from the increase will be deposited into the Nevada Highway Trust Fund.
And the Net Proceeds of Minerals Tax will revert to tax payment based on actual receipts on July 1, 2015.
Other potential revenue issues to be considered by the state Legislature includes the so-called “Main Street Fairness Act.” The measure would call for the collection of sales taxes by remote sellers from purchases made over the Internet.
Vilardo noted that the tax would probably be patterned after New York State’s Internet tax collection law. New York has a 4 percent statewide sales tax, and local jurisdictions impose additional levies. In New York City, the total tax rate is 8.875 percent.
Nevada already has an agreement with Amazon, the world’s largest online retailer, to collect tax. Under existing law, Nevadans who order and receive merchandise from remote sellers, where sales tax has not been charged, are liable for paying the sales tax. In reality, most don’t.
Vilardo said a service tax could be considered or even a transaction tax, which is an alternative to expanding the sales tax base to include services. Lawmakers could consider increasing the property tax cap of $3.64 per $100 of assessed value, but any changes would have to be approved by the voters.
Vilardo said whatever happens during the session, she urged lawmakers to consider the worst case scenario when approving any new taxes or fees. For example, she cited a property tax abatement approved by the 2005 Legislature to deal with sky rocketing property taxes during the housing boom.
The law installed a 3 percent cap on property tax rates on single family homes and 8 percent for all other property.
“It did what it was supposed to do,” Vilardo said. “But, nobody considered the worst case scenario. Nobody expected the recession. We now have a whole series of unintended consequences.”
Vilardo said from 2005 to present the cap has left Clark County with $3.8 billion less to spend than if nothing had been done. She said sometimes, “the cure is worse than the disease,” but added that there would have been problems either way brought on by the recession.