Nevada enacts major business tax legislation
Implements gross receipts tax
TAX ALERT |
UPDATE: On April 11, 2016, the Nevada Tax Commission voted to adopt the Nevada Department of Taxation’s proposed commerce tax regulations. The regulations provide interpretive guidance regarding significant definitions (e.g., 'business entity' for the purposes of determining what entities are subject to tax, 'intangible investments' for the purposes of applying the intangible investment exemption), the application of affiliated entity rules, and when an entity will be deemed to be doing business within the state for commerce tax purposes. Unfortunately, much of the guidance provided in the regulations follows the statutory provisions verbatim, and, where it varies from the statutes, is vague or fails to address outstanding uncertainties. Accordingly, even with the release of these regulations, a great deal of work needs to be done to help taxpayers understand their responsibilities, and, now, it appears that much of that work is going to occur at audit or through litigation.
On June 9, 2015, Nevada Gov. Brian Sandoval signed into law Senate Bill 483 (SB483), enacting a new gross receipts tax that may have substantial impact on in-state businesses and out-of-state businesses doing business within Nevada. Additionally, SB483 increases the quarterly rate and lowers the taxability threshold applicable to the Nevada's Modified Business Tax, a type of payroll excise tax, and increases the state's Business License Fee.
Pursuant to currently applicable Nevada law, an entity conducting business within Nevada is required to pay an annual Business License Fee of $200 to the Secretary of State.
In addition to the Business License Fee, an entity conducting business within Nevada that is an employer within the meaning of the Nevada Unemployment Compensation Law is subject to a quarterly payroll excise tax. This tax is imposed on the entity's total gross wages in excess of $85,000 that were reported by the entity for Nevada unemployment tax purposes on Line 3 of the entity's ESD Form NUCS 4072 less a deduction for health insurance/benefits and a 50 percent exemption for certain new or expanding entities during the first four years of operation. The applicable quarterly rate of tax is 1.17 percent. A functionally equivalent tax is imposed on financial institutions at a quarterly rate of 2.0 percent. There is no minimum or maximum tax.
Historically, Nevada has not imposed a business income or gross receipts tax.
Pursuant to SB483, starting on July 1, 2015, Nevada imposes an annual Commerce Tax on each business entity engaging in a business within the state during the tax year, the Nevada-sourced adjusted gross revenue of which exceeds $4 million in that tax year. For this purpose, the tax year is a static twelve-month period running from July 1 through June 30 of the following year, regardless of the taxpayer's accounting year end.
For the purposes of the Commerce Tax, the term "business entity" is defined as a "corporation, partnership, proprietorship, limited liability company, business association, joint venture, limited liability partnership, business trust, professional association, joint stock company, holding company and any other person engaged in a business."
The term business entity does not include:
- Any person or other entity Nevada is prohibited from taxing under the United States Constitution, the laws of the United States or the Nevada Constitution
- Any natural person other than a natural person engaged in a business activity and who is required to file IRS Form 1040 Schedule C (Profit or Loss From Business), Schedule E (Supplemental Income and Loss), or Schedule F (Profit or Loss from Farming)
- Any governmental entity
- An entity exempt from federal income tax pursuant to Code section 501(c)
- A business organized pursuant to Chapter 82 of the Nevada Revised Statutes (Nonprofit Corporations)
- A business organized pursuant to Chapter 84 of the Nevada Revised Statutes (Corporations Sole)
- A credit union
- A grantor trust, other than a grantor trust taxable as a business entity for federal income tax purposes, all the grantors and beneficiaries of which are either natural persons or entities exempt from federal income tax pursuant to Code section 501(c)
- An estate of a natural person other than an estate taxable as a business entity for federal income tax purposes
- Certain real estate investment trusts and qualified real estate investment trust subsidiaries
- Real estate mortgage investment conduits
- A Code section 401(a) trust
- A passive entity
- An entity the activities in Nevada of which consist solely of the ownership, maintenance, and management of the entity's intangible investments or the intangible investments of an investment company, or the collection and distribution of income earned from intangible investments or from tangible property located outside of the state.
SB483 does not provide a clear nexus standard applicable to the Commerce Tax and does not address the applicability of the Quill physical presence nexus standard and Public Law 86-272. However, SB483 does provide some definitions on which the Department of Taxation may rely in applying a nexus standard. In particular, a business entity is deemed to be "engaging in a business" for the purposes of the Commerce Tax if the business entity commences, conducts, or continues a business, exercises corporate or franchise powers regarding a business, or liquidates a business entity which is or was engaging in a business when the liquidator holds itself out to the public as conducting that business. For this purpose, the term "business" is defined as "any activity engaged in or caused to be engaged in with the object of gain, benefit or advantage, either direct or indirect, to any person or governmental entity." Based on these definitions, the $4 million taxability threshold, and the exclusion from the definition of business entity for persons that Nevada is constitutionally prohibited from taxing, Nevada could take the position that a business entity is subject to the Commerce Tax as long as (1) it has more than $4 million in Nevada sourced adjusted gross revenue, and (2) taxation would not be barred by the United States Constitution, the laws of the United States or the Nevada Constitution. This formulation is essentially a version of a bright-line factor presence standard, under which states have taken the position that a person has tax presence within the state as long as that person's apportionment receipts factor exceeds a specified threshold.
Once the determination is made that an entity is subject to the Commerce Tax, the entity's tax base must be determined. The base of the Commerce Tax is a taxpayer's Nevada-sourced adjusted gross revenue. A taxpayer's adjusted gross revenue is its gross revenue less a wide variety of specifically enumerated exclusions and deductions.
For the purpose of the Commerce Tax, the term "gross revenue" is defined as "the total amount realized by a business entity from engaging in a business in this State, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income, including, without limitation, the fair market value of any property and any services received, and any debt transferred or forgiven as consideration." Gross revenue is determined using the accounting methods applied by a taxpayer for federal income tax purposes and includes:
- Amounts realized from the sale, exchange or other disposition of a business's property
- Amounts realized from a business's performance of services
- Amounts realized from another's possession or use of a business's property or capital
- Any combination of those amounts
However, in calculating gross revenue, specific exclusions apply for:
- Amounts realized from the sale, exchange, disposition or other grant of the right to use trademarks, trade names, patents, copyrights and similar intellectual property
- The value of cash discounts allowed by a business and taken by a customer
- The value of goods and services provided to a customer on a complementary basis
- Amounts realized from a transaction subject to, described in, or equivalent to, Code sections 118, 331, 332, 336, 337, 338, 351, 355, 368, 721, 731, 1031 or 1033
- Amounts indirectly realized from a reduction of an expense or deduction
- The value of property or services donated to a Code section 501(c)(3) organization that are tax deductible pursuant to the provisions of Code section 170(c)
- Amounts that are not considered revenue under generally accepted accounting principles.
Furthermore, SB483 provides for the following deductions from gross revenue:
- Gross revenue which Nevada is prohibited from taxing under the United States Constitution, any federal law or the Nevada Constitution
- Dividends or interest on any bonds or securities of the Federal Government, the state of Nevada, or a political subdivision of Nevada (note: interest received upon bonds or securities of other states, including foreign governments, and their political subdivisions would not be subtracted from gross revenues under this provision)
- Gross revenues subject to other Nevada taxes imposed upon gross revenues (e.g., insurance companies subject to the state's gross premiums tax would be able to deduct the premiums subject to that tax from gross revenues)
- Payments received by a health care provider from certain government programs, for professional services rendered in relation to a workers' compensation claim, and the actual cost of uncompensated care, or 50 percent of these amounts if the health care provider is a health care institution
- Payments received by an employee leasing company from a client for wages, payroll taxes, employee benefits, and workers' compensation benefits for leased employees
- Pass-through revenue, including revenue that the taxpayer is required by law or fiduciary duty to distribute or pay over to another person or governmental body (e.g., sales tax collected), sales commissions paid to a person that is not an employee of the taxpayer, and revenue received from another member of the taxpayer's affiliated group
- The federal income tax basis of securities and loans sold by the taxpayer
- Revenue received that is directly derived from the operation of a facility that is located on property owned or leased by the federal government and managed or operated primarily to house members of the Armed Forces of the United States
- Interest other than interest on credit sales
- Dividends and distributions from corporations
- Distributive or proportionate shares of gross revenue from a pass-through entity
- Capital gains from the sale of property described in Code sections 1221 and 1231, but determined without regard to the taxpayer's holding period in the divested property
- Hedging receipts within the meaning of Code section 1221, except that receipts from the actual transfer of real or tangible property are not treated as receipts from a hedging transaction
- Receipts attributable to the repayment, maturity or redemption of the principal of a loan, bond, mutual fund, certificate of deposit or marketable instrument
- Principal received under a repurchase agreement or as a result of a transaction properly characterized as a loan
- Treasury stock proceeds
- Insurance proceeds
- Litigation damages
- Bad debts
- Returns and refunds to customers
- Receipts from sales of accounts receivable to the extent that the underlying receipts were included in the taxpayer's gross revenues
- Certain income received from passive entities
Once adjusted gross revenue is computed, a taxpayer must determine the portion of total adjusted gross revenue that is sourced to Nevada. For the purposes of the Commerce Tax, sourcing is accomplished by the application of a specific allocation method rather than the factor apportionment method applied in most other states. Under this method, each type of receipt must be analyzed separately using the following allocation rules:
- Gross rents and royalties from real property are sourced to Nevada if the real property is located in Nevada
- Gross receipts from the sale of real property are sourced to Nevada if the real property is located in Nevada
- Gross rents and royalties from tangible personal property are sourced to Nevada to the extent the tangible personal property is located or used in Nevada
- Gross receipts from the sale of tangible personal property are sourced to Nevada if the property is delivered or shipped to a buyer in Nevada, regardless of the freight on board point or any other condition of sale
- Gross receipts from the sale of transportation services are sourced to Nevada if both the origin and destination point of the transportation are located in Nevada
- Gross receipts from the sale of any services not specifically addressed are sourced to Nevada in the proportion that the purchaser's benefit in Nevada, with respect to what was purchased, bears to the purchaser's benefit everywhere with respect to what was purchased
- Gross receipts not otherwise described are sourced to Nevada if the gross receipts are derived from business done in Nevada
For the purposes of the last two bullet points, which include gross receipts from most services and intangibles, SB483 provides that such receipts are sourced to the state if, or to the extent that, the purchaser's physical location is within the state. However, if a taxpayer's books and records do not allow such a determination, the taxpayer may source these receipts using an alternative method as long as the method is "consistently and uniformly applied and is supported by the taxpayer's records as those records exist when the service is provided or within a reasonable period of time thereafter." This provision leaves open a wide variety of approaches, including reliance on contract terms, the location where the contract was signed, the purchaser's billing address, the seller's headquarters, a population ratio, an audience or circulation ratio, a revenue miles ratio, and a number of other options.
Lastly, SB483 includes an alternative allocation provision, under which the Department of Taxation may authorize a taxpayer to use any other allocation method if the standard specific allocation method does not fairly represent the extent of the activities of the taxpayer conducted within Nevada. The statutory language does not clearly state the nature and extent of this power. For example, it is unclear whether the Department of Taxation can require a taxpayer to use an alternative sourcing method, or may only authorize a taxpayer to do so at the taxpayer's request. Presumably, the Nevada Department of Taxation will draft and promulgate regulations to clarify these and other issues, but, without additional legislative guidance, this is an area that will likely be a hotbed of litigation if recent taxpayer experience in other states is a reasonable indicator.
Once a taxpayer determines its Nevada-sourced adjusted gross revenue, the taxpayer must calculate the amount of tax due by multiplying its Nevada-sourced adjusted gross revenue in excess of $4 million by the applicable rate. A taxpayer's applicable rate is based upon the taxpayer's North American Industry Classification System (NAICS) category. The applicable rate for each specifically delineated NAICS category is as follows:
|NAICS 11 (agriculture, forestry, fishing and hunting)||0.063%|
|NAICS 21 (mining, quarrying and oil and gas extraction)||0.051%|
|NAICS 22 (utilities) and NAICS 517 (telecommunications)||0.136%|
|NAICS 23 (construction)||0.083%|
|NAICS 31, 32, and 33 (manufacturing)||0.091%|
|NAICS 42 (wholesale trade)||0.101%|
|NAICS 44 and 45 (retail trade)||0.111%|
|NAICS 481 (air transportation)||0.058%|
|NAICS 484 (truck transportation)||0.202%|
|NAICS 482 (rail transportation)||0.331%|
|NAICS 483, 485, 486, 487, 488, 491, and 492 (other transportation)||0.129%|
|NAICS 493 (warehousing and storage)||0.128%|
|NAICS 511, 512, 515, and 518 (publishing, software, and data processing)||0.253%|
|NAICS 52 (finance and insurance)||0.111%|
|NAICS 53 (real estate and rental and leasing)||0.250%|
|NAICS 54 (professional, scientific and technical services)||0.181%|
|NAICS 55 (management of companies and enterprises)||0.137%|
|NAICS 561 (administrative and support services)||0.154%|
|NAICS 562 (waste management and remediation services)||0.261%|
|NAICS 61 (educational services)||0.281%|
|NAICS 62 (health care and social assistance)||0.190%|
|NAICS 71 (arts, entertainment, and recreation)||0.240%|
|NAICS 721 (accommodations)||0.200%|
|NAICS 722 (food services and drinking places)||0.194%|
|NAICS 81 (other services)||0.142%|
For Commerce Tax purposes, a taxpayer that engages in business activities that could fall within more than one NAICS category must calculate tax based on the NAICS category from which it derives the highest percentage of its Nevada adjusted gross revenue. If an appropriate NAICS category still cannot be determined, the unclassified rate must be applied.
The annual Commerce Tax return is due 45 days after the end of the tax year, which runs from July 1 through June 30 of the following year. The first tax year to which the tax applies is July 1, 2015, through June 30, 2016, and the first Commerce Tax return will be due on Aug. 14, 2016, which is a Sunday. SB483 makes no provision regarding the filing of returns due on a weekend or holiday, and it is unclear whether a return filed on the following work day will be considered timely. Nevada Department of Taxation officials have provided us informal guidance indicating that the initial Commerce Tax return will be due on Aug. 16, 2016. However, this due date is not supported by the statutory provisions. SB483 does provide that taxpayers may request up to a 30-day extension by filing an extension request with the Department of Taxation before the due date. This extension is not automatic and may only be granted by the Department of Taxation on a showing of "good cause" by the taxpayer.
Commerce Tax uncertainties
Because the law is new there are many uncertainties to be resolved by future regulatory interpretation and resulting controversy. Some of these include:
- Physical vs. economic nexus standard
- Characterization of sales of cloud service and digital products as sales of services, intangibles or tangible personal property for allocation purposes
- Limitation of the $4 million exclusion to members of affiliated groups
- Potential taxation of related party transactions where ownership less than 50 percent
- Potential double taxation of subcontractor payments not covered as a deduction in the law
Modified Business Tax
Pursuant to SB483, the generally applicable quarterly Modified Business Tax rate is increased to 1.475 percent, with a potential rate reduction every two years to a minimum of 1.17 percent. The 2.0 percent rate applicable to financial institutions is retained, but the 2.0 percent tax is extended to mining businesses. Additionally, the tax base of total gross wages reported for Nevada unemployment tax purposes remains unchanged from current law, and, therefore, the deduction for employee health care benefits is retained. However, the quarterly exemption amount is reduced to $50,000 in taxable wages from $85,000. SB483 provides a business with a dollar-for-dollar credit in the amount of 50 percent of the annual Commerce Tax paid to offset the business' quarterly Modified Business Tax in the next tax year. This credit is allowed on a front-loaded quarterly basis within the tax year until exhausted, and cannot be carried forward to another tax year. Lastly, there will continue to be no minimum or maximum tax. These changes are effective July 1, 2015.
Business License Fee
SB483 increases the annual Business License Fee to $500 per year for Nevada corporations and non-Nevada corporations registered with the Nevada Secretary of State, and $200 per year for all other businesses. This change is effective July 1, 2015.
The creation of the Commerce Tax and rate increases in the existing Modified Business Tax and Business License Fee will result in across the board increases in the amount of tax that Nevada businesses and out-of-state businesses doing business in Nevada will pay to the state. Out-of-state businesses that previously did not pay Nevada taxes will need to determine whether they will be required to do so when SB483 goes into effect on July 1. In particular, out-of-state businesses will need to review their Nevada activities to see if they fall within the purview of the Commerce Tax.
The Commerce Tax is a complex gross receipts tax that has many open issues in relation to nexus and apportionment, and, as a new tax, is in need of forms, instructions and other administrative guidance. However, given that Nevada has not historically imposed a business income or gross receipts tax, it is possible that the Department of Taxation will not be able to provide all the necessary guidance prior to the due date for the first Commerce Tax return. Additionally, it is uncertain how long it will take for the Department of Taxation to build the infrastructure to properly administer the tax, and whether and how taxpayers will be able to seek informal or formal guidance on an ad hoc basis. These factors create a high likelihood that taxpayers will be required to take positions on original returns without proper guidance, and that the appropriateness of these positions will have to be settled through litigation. Analyzing and documenting positions taken will be particularly important in the first few Commerce Tax years.
Businesses should also consider planning opportunities and potential traps for the unwary. For example, the Commerce Tax is imposed on a separate entity basis, and no provision is made for consolidation or combination, mandatory, by election, or forced. Accordingly, it is possible in some circumstances for businesses to structure their activities to maximize the applicable exclusions and deductions. On the flip side, separating operations and payroll into separate entities could result in a situation where one entity has all of the available Commerce Tax credits while the other entity pays all of the Modified Business Tax.
In addition, businesses should consider the financial accounting and financial statement implications of the Commerce Tax. From a financial accounting standpoint, taxpayers may need to calculate a special year end for Nevada Commerce Tax purposes in order to be able to calculate their taxes, including recognition of Nevada gross income, exclusions and deductions. From a financial statement standpoint, taxpayers should prepare for quarterly accrual as well as perform appropriate reserve analysis. Taxpayers should begin to prepare now by implementing systems to gather information to accommodate the Commerce Tax calculation.