Nevada introduces gross revenue tax
Proposed legislation yields more questions than answers
TAX ALERT |
On March 11, 2015, the Nevada Senate Committee on Revenue and Economic Development, acting on behalf of the Department of Administration, introduced Senate Bill No. 252, which would repeal the state’s annual business license fee and replace it with a quarterly graduated gross revenue tax.
Under current law, businesses that are doing business within Nevada are subject to a $200 business license fee, payable annually to the Nevada Secretary of State. That fee is scheduled to be reduced to $100 per year starting on July 1, 2015. Pursuant to the legislation proposed by Gov. Brian Sandoval and currently before the Nevada legislature, this fixed license fee would be repealed effective July 1, 2015.
The legislation would replace the annual business license fee with a quarterly graduated gross revenue tax. This tax would apply to businesses primarily engaged in activities that fall under specified North American Industry Classification System (NAICS) categories, as well as those that fall under one unclassified business category, and would be calculated using a graduated fixed fee approach. The minimum tax due for businesses in all industries would be $100, and the maximum tax would be capped at the industry-specific fixed fee set for the bracket starting at gross revenue in excess of $275,572,755. For example, a business in NAICS 484, the truck transportation business category, would determine its tax liability using the following brackets:
By comparison, a business in NAICS 482, the rail transportation category, would determine its tax liability using the following brackets:
As can be seen from these two samples, while the minimum tax for businesses across industries will be $100, the rate at which the amount of the fixed fee increases and the applicable maximum fee will vary significantly from one industry to another.
The proposed legislation defines the term “Nevada gross revenue” as “[…] the gross revenue of a person from conducting a business in this State, as adjusted […] and sitused to this State [...].” The term “gross revenue” is defined as “[…] the total amount realized by a person from the conduct of 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.” In relation to adjusting gross revenue to arrive at Nevada gross revenue, the legislation provides for a number of deductions and exemptions, including adjustments for:
- Interest upon any bonds or securities of the Federal Government, the State of Nevada or a political subdivision of Nevada
- Gross revenues subject to other Nevada taxes imposed upon gross revenues
- Pass-through revenue, including revenue received from another member of the business’ affiliated group
- Interest and dividends, other than interest on credit sales
- Certain capital gains
- Tax basis of securities
- Insurance proceeds
- Treasury stock proceeds
- Principal repayments
- Litigation damages
- Bad debts
- Returns and refunds
- Cash discounts
- Receipts from sales of accounts receivable
- Passive entity income
- Other industry or transaction-based deductions
In relation to sourcing gross revenue to arrive at Nevada gross revenue, the legislation provides for a specific allocation method rather than the use of an apportionment factor. Under this method:
- Gross rents and royalties from real property would be sourced to Nevada if the real property is located in Nevada
- Gross receipts from the sale of real property would be sourced to Nevada if the real property is located in Nevada
- Gross rents and royalties from tangible personal property would be 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 would be 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 would be 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 would be 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 would be sourced to Nevada if the gross receipts are derived from business done in Nevada
The legislation also includes an alternative apportionment provision, which would allow the business to petition the Department of Revenue, or the department to require, the use of any other allocation method if the standard specific allocation method does not fairly represent the extent of the activities of the business conducted within Nevada.
If the legislation passes, businesses would be required to file Nevada gross revenue tax returns quarterly, and tax would be due and payable no later than 45 days after the end of the quarter.
Legislation leaves significant unanswered questions
Although the legislation, weighing in at well over a hundred pages, makes some attempt to be comprehensive, it fails to address a number of issues common to similar taxes, such as the Texas margins tax or the Washington business and occupation (B&O) tax, including:
- Apportionment : How does Nevada propose to apportion service-type revenue related to activities performed inside and outside the state? Will it be sufficient to situs to Nevada the proportion of services to the extent that the purchaser benefited from such services in Nevada compared to everywhere the purchaser benefited from such services?
- Nexus and P.L. 86-272 : Does Nevada view the gross revenues tax as the equivalent of a sales tax and intend to apply physical presence nexus standards, or does Nevada view the tax as an income tax and intend to apply economic nexus standards? Or does Nevada view this tax as a hybrid tax, to which it intends to apply different nexus standards depending on the business of the particular taxpayer? In any of these circumstances, how would the federal protections provided under Public Law 86-272 come into play?
- Interstate commerce : Is Nevada prepared to address the risk of multiple burden issue? For example, if a widget is manufactured in Nevada, with Nevada business license tax paid, then sold in Washington and subjected to Washington’s wholesaling B&O tax, will Nevada allow a credit against its business license tax for the Washington B&O tax that was paid? Or, does Nevada intend to apply its tax only to the extent that products are manufactured in Nevada and delivered to the buyer in Nevada?
- Regressive nature of the tax : Since the tax base has a quarterly cap of $275,572,755, the tax has a higher relative impact on businesses with smaller revenues. For example, a local privately owned convenience store would pay (and pass along to its customers) a higher effective tax rate as a percentage of revenue than a large multistate “big box” retailer whose Nevada revenues substantially exceed the cap amount.
Presuming that Nevada pushes this legislation through to passage, the unfavorable resolution of these questions and others in the same vein, could drive an unanticipated ballooning of the tax due from some businesses, particularly those that operate in multiple states.
Although this proposed legislation is early in the legislative process, it is important to consider the potential impact of this new tax now because the timeline from prospective passage to the proposed effective date of July 1, 2015, is short. In terms of next steps, Gov. Sandoval will work to build support in both houses of the Nevada legislature, in which he must gain two-thirds approval.