Press Room: Tax Release

July 21, 2015

Nevada, a Tax Haven No More: $1.1B Tax Increase Includes a New Tax on Business Receipts

On June 10, 2015, Nevada Governor Brian Sandoval signed Senate Bill 483 (SB 483) that creates a new Commerce Tax modeled on the gross receipts taxes imposed in Ohio and Washington State. The tax is imposed on each business entity for the privilege of engaging in a business in the state whose Nevada gross revenue exceeds $4 million. The business activity primarily conducted in Nevada dictates the tax rate. Businesses engaged in gaming, mining, and insurance are able to exclude from the commerce tax any revenue already subject to taxes in those areas.

The legislation also increases the annual state business license fee applicable to all corporations organized under the laws of Nevada and all foreign corporations authorized to transact business in Nevada; amends the payroll-based business tax and the Nevada-based payroll tax on financial institutions; increases the excise tax on cigarettes, and makes permanent the 0.35% Local School Support Tax portion of the state sales and use tax.

The Commerce Tax

Effective July 1, 2015, the new Commerce Tax imposes an annual tax for the privilege of engaging in a business in Nevada and applies the tax on an entity-by-entity basis on each business entity with gross revenue in Nevada exceeding $4 million for that taxable year. The term engaging in a business is defined as commencing, conducting or continuing a business, the exercise of corporate or franchise powers regarding a business, and the liquidation of a business which is or was engaging in a business . . .

Who is subject to the tax?

The definition of business entity includes:

  • Corporation
  • Partnership
  • Proprietorship
  • Limited liability company
  • Business association
  • Joint venture
  • Limited liability partnership
  • Business trust
  • Professional association
  • Joint stock company
  • Holding company
  • Any other person engaged in business

It does not include:

  • Governmental entities
  • Organizations that qualify as a nonprofit under IRS code 501(c)
  • A business organized under Nev. Rev. Stat. (NRS) Ch. 82 or 84
  • A credit union organized under NRS 678
  • Grantor trusts
  • Estates other than those for the benefit of a business entity
  • REITs and REMICS
  • Trusts under Internal Revenue Code (IRC) Sec. 401(a)
  • Entities that meet the definition of a passive entity under Nevada law
  • Persons who own, maintain, and manage intangible investments
  • Persons who take part in exhibitions held in Nevada for which a state business license is not required

The tax applies on a separate-entity basis and includes entities that may be disregarded for federal tax purposes.

What is taxable?

To determine Nevada gross revenue, the starting point is the total gross revenue of the business entity. For purposes of the tax, gross revenue is defined as the total amount realized by a business entity from engaging in 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 does not include:

  • Amounts realized from the sale, exchange, disposition or other grant of the right to use trademarks, trade names, patents, copyrights and similar intellectual property
  • Cash discounts taken by a customer
  • The value of complimentary goods or services provided to a customer
  • Amounts realized from transactions governed by IRC Secs. 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 donations deductible under IRC Sec. 170(c) to specified nonprofit organizations
  • Amounts not considered revenue under generally accepted accounting principles

After determining the total gross revenue, the next step is to make the appropriate deductions. Deductions allowed include:

  • Dividends and interest upon any bonds or securities of the federal government, Nevada, or its political subdivision
  • Gross receipts used to calculate certain industry-specific taxes in gaming and mining
  • The amount of excise tax paid on liquor for businesses required to pay tax under NRS Ch. 369
  • Certain amounts required to be paid by business entities under NRS 680B related to insurance taxes and fees
  • The amount of premiums used to calculate tax imposed under NRS 694C.450 for captive insurers and NRS 685A.180 for non-admitted insurance
  • Specified payments received by healthcare providers and by a health care institutions
  • Payments received by employee-leasing companies for employees leased to the client company
  • The amount of pass-through revenue received by a business, including, but not limited to, revenue received by a business entity that is part of an affiliated group from another member of the affiliated group
  • The tax basis of securities and loans sold, as determined for federal income taxation
  • Interest income other than interest on credit sales
  • Dividends and distributions from corporations and distributive receipts and income from pass-through entities
  • Receipts for the sale, exchange, or other disposition of an asset described in IRC Secs. 1221 or 1231
  • Receipts from certain hedging transactions and loan repayments;
  • Specified proceeds from certain insurance policies, litigation damages, bad debts expensed, customer returns and refunds, and cash discounts
  • Amounts realized from the sale of an account receivable to the extent gross revenue from the underlying transaction was previously included in the tax base
  • If the business entity owns a passive entity, the business entity’s share of the net income of the passive entity, but only to the extent the net income of the passive entity was generated by the gross revenue of another business entity

Multistate taxpayer sourcing rules

In order to determine Nevada gross revenue, the revenue should then be sitused according the applicable sourcing rules. Gross revenue from real property, including sales, rents, and royalties, is sourced based on the location of the property. Gross revenue from sales of tangible personal property is sourced based on where the property is delivered or shipped to the buyer. Gross revenue from rents or royalties from tangible personal property is sourced based on where the property is used or located. Gross revenue from sales of services is sourced generally following market-based sourcing rules. In Nevada, this means sourcing them in the proportion the purchaser’s benefit in Nevada bears to the purchaser’s benefit everywhere with respect to the purchased services. If the sourcing rules do not fairly represent the extent of the business conducted in Nevada, the Nevada Department of Revenue (Department) may authorize the use of an alternative sourcing method.

Tax rates

If the amount of Nevada gross revenue exceeds the $4 million threshold, then the appropriate tax rate for the type of business in which the entity is primarily engaged in Nevada is applied. The Commerce Tax divides businesses into 26 different categories, each consisting of one or more industry classifications from the North American Industry Classification System (NAICS). The tax rates were determined based on a study of the Texas Margin Tax with revisions for Nevada’s economy.

If the business encompasses multiple categories, it will be taxed under the category to which the plurality of its economic activity in Nevada is attributable. This measurement is based upon Nevada gross revenue rather than total gross revenue. Once a business designates its classification on its first report, it may not change that category unless it applies to the Department and the Department determines it is no longer primarily engaged in that industry.     

Business Classification Tax Rate         Business Classification                              Tax Rate       
Rail Transportation 0.331% Educational Services 0.281%
Waste Management Services   0.261% Publishing, Software, Data Processing 0.253%
Real Estate 0.250% Arts, Entertainment, and Recreation 0.240%
Tuck Transportation 0.202% Accommodation 0.200%
Food Services 0.194% Health Services 0.190%
Professional Services 0.181% Administrative and Support Services 0.154%
Other Services 0.142% Management of Companies 0.137%
Utilities/Telecommunications 0.136% Other Transportation 0.129%
Warehousing and Storage 0.128% Unclassified 0.128%
Retail Trade 0.111% Financial Activities 0.111%
Wholesale Trade 0.101% Manufacturing 0.091%
Construction 0.083% Agriculture 0.063%
Air Transportation 0.058% Mining 0.051%

 

Filing Requirements

The due date for the Commerce Tax is within 45 days of the end of the taxable year, which is defined as the 12-month period beginning on July 1 and ending on June 30 of the following year. The Department is authorized to grant a 30-day extension for good cause upon written application, though the form for that application is not designated in the law. As such, the due date for the report would be August 14th, with an extension available until September 13th. It is notable that the law requires taxpayers to use the July 1st to June 30th tax year and use the same method of accounting for gross revenue as used for federal income tax purposes. It appears that the law requires all taxpayers to use the July 1st to June 30th tax year regardless of the taxpayer’s tax year for federal income tax purposes.