As many CPAs may be aware, the state of Nevada has historically never imposed an entity-level corporation income tax on companies doing business within its jurisdiction. As a result, Nevada was always viewed as a favorable tax haven when it came to state and local tax planning. This is now changing in light of the 2015 legislation passed by Nevada that levies a new gross receipts tax in order to generate revenue. Many companies affected by this tax will be filing for the first time, and tax professionals must be aware of these changes and the potential impact on their clients.
On May 31, 2015, the Nevada Legislature approved Senate Bill 483, a package of tax changes collectively referred to as the Nevada Revenue Plan. The measure is expected to generate $1.5 billion in new and extended taxes, primarily through a new gross receipts tax called the Commerce Tax. Major provisions of Nevada’s tax and revenue plan include 1) the new Commerce Tax on the gross receipts of Nevada businesses that have annual revenue of $4 million or more, 2) increases to the annual corporation business fee 3) expansion of the payroll tax, 4) increases in the cigarette tax, and 5) changes to the Live Entertainment Tax. The legislation was signed into law by Governor Brian Sandoval on June 10, 2015, and went into effect on July 1, 2015.
The new Commerce Tax is imposed on a separate basis on each business entity engaged in a business in Nevada whose Nevada gross income in a taxable year exceeds $4 million. For purposes of the Commerce Tax, the term “business entity” is defined to include 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 business.” A business entity includes natural persons required to file a Form 1040 Schedule C (Profit or Loss from Business), a Schedule E (Supplemental Income and Loss), or a Schedule F (Profit or Loss from Farming). Real estate investment trusts and passive entities are excluded from the business entity definition.
The rate of tax depends on the industry/business category in which the entity is “primarily engaged.” The law creates 26 business categories, consisting of one or more industry classifications as delineated by the North American Industry Classification System (NAICS). Each business category has its own gross receipts tax rate, ranging from 0.051% to 0.331%; a full list is provided in the Exhibit. If a business entity is engaged in more than one business category, it is deemed primarily engaged in the business category in which the highest percentage of its Nevada gross revenue is generated. Once a business entity initially designates a business category on a Commerce Tax report, it may not change its category without the Department of Taxation’s authorization.
Nevada Business Categories
The Commerce Tax is computed by multiplying a taxpayer’s Nevada gross revenue by the rate applicable to the taxpayer’s specific business category. Gross revenue 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. In computing the Commerce Tax due, however, various exclusions and deductions from gross revenue are allowed, including deductions for interest income, dividends, industry-specific deductions, receipts from passive entities, distributions from pass-through entities, and certain bad debts.
Commerce Tax reports are due on or before the 45th day immediately following the end of the taxable year, which for 2016 is August 15. A taxable year is defined as the 12-month period beginning on July 1 and ending on June 30 of the following year. All companies subject to this tax must adhere to this fiscal year period of reporting and will need to keep adequate books and records to ensure they capture all required information to file their returns. All records must be kept for four years. In addition, any company that has nexus or is subject to the Commerce Tax must file a return, even if there is no tax due. Any corporation required to file an initial or annual list with the Secretary of State must also file a Commerce Tax return, even if there is no tax liability. Furthermore, for the first 2015/16 taxable year, Nevada has implemented a special provision for a waiver of interest and penalty for anyone that fails to timely file the report before February 15, 2017, if the failure 1) occurred despite the person’s exercise of ordinary care and 2) was not intentional or the result of willful neglect. In following years, a 30-day extension may be granted for good cause upon written application. Interest is imposed during the extension period, but penalties are not assessed.
Finally, Nevada will allow 50% of the Commerce Tax to be paid as a credit against the payroll tax or Modified Business Tax (MBT). The credit is available for four calendar quarters following payment of the Commerce Tax, and the credit cannot be more than the MBT liability.
Additional tax changes in the Nevada Revenue Plan include the following:
- Business license fee. Under prior law, all Nevada businesses paid a business license fee (BLF) of $200 annually. Pursuant to the new legislation, the BLF has increased to $500 for corporations but remains $200 for pass-through entities.
- Payroll tax. The MBT was previously imposed at a rate of 1.17% on wages paid above the exemption level of $85,000 per quarter. For most businesses, the exemption level has been reduced to $50,000, and the MBT has been increased to 1.475%. Mining and financial institutions now pay a 2% rate.
- Cigarette tax. The cigarette tax has increased by 125%, from $.80 per pack to $1.80 per pack.
- Live Entertainment Tax. The Live Entertainment Tax (LET) applies to admission, food and beverage, and merchandise at venues where there is an admission charge and live entertainment is provided. There are numerous exemptions to the LET; NASCAR remains exempt as long as it holds two races per year in Nevada.
A Challenging Implementation
As has been the case in states that have enacted new gross receipts taxes, most notably Texas and Ohio, the initial implementation of such taxes has been a bit challenging for the taxing authorities, taxpayers, and professionals. Typically, implementation of significant new taxes requires extensive interpretations and guidance from the revenue authorities responsible for administering such taxes. Needless to say, tax professionals should expect the new Nevada Commerce Tax to go through a similar period of extensive interpretation by the Nevada Department of Taxation. Accordingly, CPAs with Nevada clients should monitor Nevada’s implementation of the new Commerce Tax, as well as changes to other taxes, to ensure effective compliance with the new law.