Nevada Enacts Budget Bill Including New Commerce Tax - Corporate Tax

On June 9, 2015, Nevada Governor Brian Sandoval signed legislation which imposes a new commerce tax on businesses with more than $4 million in annual Nevada gross revenue beginning on July 1, 2015.¹ Various tax rates apply to taxable entities based on their primary industry. The legislation also makes other changes, including amendments to the Nevada excise tax and business license fees.

Business Entities Subject to the Commerce Tax

Beginning July 1, 2015, each business entity engaging in a business in Nevada during a taxable year with annual Nevada-sitused gross revenue exceeding $4 million will be required to file a commerce tax return and pay the commerce tax.² The tax is imposed on each "business entity," including corporations, partnerships, limited liability companies, and limited liability partnerships, on a separate company basis.³ The commerce tax does not apply to certain businesses specifically excluded from the "business entity" definition, including passive entities. The term "passive entity" includes limited liability companies, general partnerships, limited partnerships or limited liability partnerships, or trusts (other than business trusts) that satisfy two separate income tests. To be considered passive, the business (i) must earn at least 90 percent of its federal gross income from defined passive income, including dividends, interest, capital gains, and royalties⁴, and (ii) must not receive more than 10 percent of its federal gross income from conducting a trade or business.⁵

Determination of Gross Revenue

Once a business is determined to be a business entity subject to the commerce tax, gross revenue is calculated. Gross revenue for purposes of the commerce tax is defined as "the total amount realized by a business entity from engaging in business in Nevada, 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."⁶ Specifically, gross revenue includes amounts realized from the sale, exchange or other disposition of property, amounts realized for the performance of services, and amounts realized "from another person's possession of the property or capital of a business entity."⁷

Gross revenue is then subject to a series of exclusions and specific deductions. Excluded from gross revenue are:

Amounts realized from the sale, exchange, disposition or other grant of the right to use certain intellectual property;
Cash discounts;
The value of goods or services provided to customers on a complimentary basis;
Amounts realized from certain specified federal income tax-free or tax-favored transactions;
Amounts indirectly realized from a reduction of an expense or deduction;
The value of property or services donated to a nonprofit organization; and amounts not considered revenue under generally accepted accounting principles.⁸

With respect to specific deductions, the following amounts are deductible from gross revenue to the extent they were originally included in gross revenue of the business entity:

Any gross revenue which Nevada is prohibited from taxing pursuant to the U.S. or Nevada Constitutions;
Any gross revenue attributable to dividends and interest received upon federal or Nevada (state or local) bonds or securities;
If a business entity is required to pay a Nevada license fee, the amount of its gross receipts used to determine the amount of that fee;
Any gross revenue amounts used to calculate certain industry-specific license fees and taxes in the liquor, gaming and mining industries;
Certain gross receipts and/or premiums received by business entities required to pay specific insurance fees and taxes;
Certain payments received by health care providers and by health care institutions;
Certain payments received by employee leasing companies;
Pass-through revenue received by a business entity;
The federal income tax basis of securities and loans sold;
Gross revenue 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 United States military;
Interest income other than interest on credit sales;
Dividends and distributions from corporations, and distributive shares of receipts and income from pass-through entities;
Receipts from the sale, exchange, or other disposition of an asset described in Internal Revenue Code Sections 1221 or 1231;

Receipts from certain hedging transactions and loan repayments;
Certain proceeds from stock issuance, insurance policies, litigation damages, bad debts expensed, customer returns and refunds, and cash discounts;
Certain amounts realized from the sales of accounts receivable; and
Income from a passive entity in which the business entity owns an interest, to the extent the net income of the passive activity was generated by the gross income of another business entity.⁹

Notable in this extensive list of deductions from gross revenue is the deduction for passthrough income, which term is defined to include revenue received by a business entity that must be distributed to another person or entity, collected taxes which must be remitted, certain reimbursements for advances made on behalf of a customer or client, revenue that must be distributed to another person pursuant to contract if it includes sales commissions, the tax basis of securities, or subcontracting payments, certain revenue received in a fiduciary context in providing legal services, and revenue received by a business entity that is part of an affiliated group from another member of the same group.¹⁰

Situsing of Gross Revenue

After the gross revenue base is calculated, the gross revenue is sitused in order to determine the amount of Nevada gross revenue subject to the commerce tax. The situsing rules primarily utilize market-based sourcing. Specifically:

Revenue from gross rents and royalties, as well as from the sale of real property, is sourced based on the location of the property;
Gross revenue from the sale of tangible personal property is sitused to Nevada if the property is delivered or shipped to a Nevada buyer;
Gross revenue from the sale of transportation services is sitused to Nevada if both the origin and the destination point of the transportation are located in Nevada;
Gross revenue from services is generally sitused to Nevada based upon the proportion that the purchaser's benefit in Nevada bears to the purchaser's benefit everywhere with respect to the purchased services; and
Gross revenue not otherwise described is sitused to Nevada if the gross receipts are from business conducted in Nevada.¹¹

If the sourcing rules do not fairly represent the extent of the business conducted in Nevada by a business entity, the Department may authorize the entity to use an alternative method of apportionment.¹²

Tax Rates

Taxable Nevada gross revenue exceeding the $4 million annual threshold is subject to tax at a rate based upon the specific industry in which the business entity is primarily engaged.¹³ The initial report filed by each business entity must designate the appropriate industry, which may not be changed absent Department consent.¹⁴ For entities engaging in multiple lines of business, the tax rate is determined based on the primary industry in which the entity generates the highest percentage of its Nevada gross revenue.¹⁵ Twentysix different industry rates are specified, ranging from 0.051 percent for mining, quarrying, and oil and gas extraction to 0.331 percent for rail transportation.¹⁶

Due Dates, Extensions and Statute of Limitations

Commerce tax returns are generally due along with the required tax payment on or before the 45th day immediately following the end of each taxable year and must be filed on a form prescribed by the Department.¹⁷ For good cause, an extension of up to 30 days may be granted.¹⁸ The statute of limitations applicable to commerce tax refund claims generally is three years after the last day of the month following the last month of the taxable year for which the overpayment was made.¹⁹

Modified Business (Payroll) Tax

Under previously existing law, the modified business (payroll) excise tax rate imposed on certain businesses (other than financial institutions) based on wages exceeding $85,000 paid by a business in each calendar quarter was scheduled to be reduced from 1.17 percent to 0.63 percent as of July 1, 2015.²⁰ Existing law also imposed a similar excise tax on financial institutions at the rate of 2 percent of wages.²¹ Provisions of the new law modify the terms of both excise taxes.

As of July 1, 2015, businesses subject to tax on the net proceeds from certain mining activities must now pay the excise tax based on payroll at the same rate as that imposed on financial institutions.²² The excise tax is also now imposed on businesses other than mining and financial institutions at the rate of 1.475 percent of total wages paid per quarter exceeding $50,000.²³ A credit in the amount of 50 percent of the new commerce tax paid is allowed against this excise tax.²⁴ Finally, a reduction to the excise tax rate paid by all businesses will be enacted if the combined revenue from the commerce tax and the tax on wages exceeds a specified threshold amount.²⁵

Other Taxes

Other changes imposed by the new law include:

An extension of the required advance payment of tax on net proceeds from certain mining operations based on the estimated net proceeds and royalties from mining operations was scheduled to expire on June 30, 2015. The advance payment requirement is extended through June 30, 2016;²⁶
An increase in the annual state business license fee to $200 for some entities and to $500 for certain corporations, including foreign corporations. The fee had been scheduled to decrease to $100;²⁷
An indefinite extension of the 0.35 percent Local School Support Tax portion of the state-level sales and use tax;²⁸ and
An increase in the amount of cigarette tax.²⁹

Commentary

The enactment of the Nevada commerce tax is a very unlikely step taken by a jurisdiction that traditionally has been viewed as one of the most business-friendly jurisdictions in the United States. According to budgetary estimates, the new commerce tax alone is expected to raise $1.1 billion in new and extended taxes, with much of the revenue being earmarked for education spending. Perhaps the promise of a bright future for its youngest constituents helped strengthen the bill's popularity with the Nevada legislature.³⁰

Nevada's commerce tax appears to graft portions of three of the United States' most distinctive corporate tax systems employed by Ohio, Texas and Washington, along with popular market-based sourcing conventions used by many standard corporation income tax systems. While Ohio, Texas and Washington expected significant revenue from enactment of their non-traditional corporate taxes, they have been somewhat disappointed by what these taxes have brought in from a revenue perspective in practice. It will be interesting to see whether the projected revenue figures associated with the Nevada tax prove true. Only time will tell whether the anticipated revenue will materialize.

Footnotes

1 Ch. 487 (S.B. 483), Laws 2015.

2 Ch. 487 (S.B. 483), Laws 2015, § 20. The term 'taxable year' is defined to include the 12-month period beginning on July 1 and ending on June 30 of the following year. Ch. 487 (S.B. 483), Laws 2015, § 12.

3 Ch. 487 (S.B. 483), Laws 2015, § 4.1. The term "business entity" also includes a proprietorship, business association, joint venture, business trust, professional association, joint stock company, holding company, and any other person engaged in business. Id.

4 Ch. 487 (S.B. 483), Laws 2015, § 14. For purposes of determining whether a business qualifies as passive, the term "income" excludes rent and certain income earned by a nonoperator from mineral properties under a joint operating agreement.

5 Ch. 487 (S.B. 483), Laws 2015, § 14.1(b), (c). In addition, the term "business entity" excludes: persons or entities that Nevada is prohibited from taxing pursuant to the Nevada or U.S. Constitution, certain "natural persons," unless engaged in business and required to file Form 1040 Schedule C, E or F with their federal individual income tax returns; certain governmental entities, nonprofit organizations, credit unions, grantor trusts, certain estates, certain real estate investment trusts, certain real estate mortgage investment conduits, passive entities, persons whose Nevada activities are confined to owning, maintaining, and managing 'intangible investments' as defined by law, and persons who take part in exhibitions held in Nevada for which a state business license is not required. Ch. 487 (S.B. 483), Laws 2015, § 4.2.

6 Ch. 487 (S.B. 483), Laws 2015, § 8.1.

7 Ch. 487 (S.B. 483), Laws 2015, § 8.2.

8 Ch. 487 (S.B. 483), Laws 2015, § 8.3.

9 Ch. 487 (S.B. 483), Laws 2015, § 21.1.

10 Ch. 487 (S.B. 483), Laws 2015, § 11.

11 Ch. 487 (S.B. 483), Laws 2015, § 22.1. It should be noted that for purposes of the sourcing rules governing gross revenue from services and gross revenue not otherwise described in the situsing statute, the physical location of the purchaser is "paramount" to the situsing determination. Ch. 487 (S.B. 483), Laws 2015, § 22.1(f), (g).

12 Ch. 487 (S.B. 483), Laws 2015, § 22.2

13 Ch. 487 (S.B. 483), Laws 2015, § 23. For purposes of the specific tax rates applied, the commerce tax statute references industries by their 2012 North American Industry Classification System (NAICS) category.

14 Ch. 487 (S.B. 483), Laws 2015, § 20.3.

15 Ch. 487 (S.B. 483), Laws 2015, § 15.

16 Ch. 487 (S.B. 483), Laws 2015, §§ 24-49. The full list of rates for specific industries is as follows: agriculture, forestry, fishing and hunting (0.063 percent); mining, quarrying and oil and gas extraction (0.051 percent); utilities and telecommunications (0.136 percent); construction (0.083 percent); manufacturing (0.091 percent); wholesale trade (0.101 percent); retail trade (0.111 percent); air transportation (0.058 percent); truck transportation (0.202 percent); rail transportation (0.331 percent); other transportation (0.129 percent); warehousing and storage (0.128 percent); publishing, software and data processing (0.253 percent); finance and insurance (0.111 percent); real estate and rental and leasing (0.25 percent); professional, scientific and technical services (0.181 percent); management of companies and enterprises (0.137 percent);administrative and support services (0.154 percent); waste management and remediation services (0.261 percent); educational services (0.281 percent); health care and social assistance (0.190 percent); arts, entertainment and recreation (0.24 percent); accommodation (0.2 percent); food services and drinking places (0.194 percent); other services, including services not included in the above industries (0.142 percent); and unclassified business activities (0.128 percent).

17 Ch. 487 (S.B. 483), Laws 2015, § 20.2.

18 Ch. 487 (S.B. 483), Laws 2015, § 20.4.

19 Ch. 487 (S.B. 483), Laws 2015, § 52.1(a).

20 NEV. REV. STAT. §§ 363B.030, 363B.110.

21 NEV. REV. STAT. §§ 363A.030, 363A.130.

22 Ch. 487 (S.B. 483), Laws 2015, §§ 67, 68.

23 Ch. 487 (S.B. 483), Laws 2015, § 70.

24 Ch. 487 (S.B. 483), Laws 2015, §§ 68, 70.

25 Ch. 487 (S.B. 483), Laws 2015, § 62.

26 Ch. 487 (S.B. 483), Laws 2015, §§ 103, 105, 106, 107.

27 Ch. 487 (S.B. 483), Laws 2015, §§ 74-75.

28 Ch. 487 (S.B. 483), Laws 2015, § 104. The tax had been set to expire on June 30, 2015.

29 Ch. 487 (S.B. 483), Laws 2015, §§ 71-73.

30 The bill passed the Nevada Assembly with a vote of 30-10 and the Senate by a vote of 18-3.

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