07 Aug 2015 Nevada Gross Revenue Tax Client Update
Effective July 1, 2015, in addition to increasing and revising existing taxes, Nevada has implemented a new “annual commerce tax” on “business entities” “engaged in business in Nevada.” The tax is placed on businesses’ Nevada-located annual gross receipts in excess of $4 million.
Because it is a gross receipts tax and not an income tax, no deduction is given for most business expenses. For this reason, gross receipts taxes tend to disfavor low margin businesses in favor of high margin businesses. They also tend to disfavor businesses that revolve around non-integrated supply chains, because they create “tax pyramiding”, where a tax’s base includes another tax.
An example of a pyramiding gross receipts tax is where a miner is taxed for raw material sales, and thus he charges more highly the metal refiner, who will then increase the sales price of his refined metal to absorb the additional tax from below, and will also get a new layer of tax on this increased price as he sells to a metal worker, and so on up the chain as metal worker sells to distributor, to construction firm, etc. If all of these tasks were done under one roof, however, the pyramiding would be avoided. Similar taxes exist that avoid pyramiding: Value added taxes address this problem by allowing offsets for taxes paid in earlier steps of a supply chain, while sales and use taxes only tax a final, “consumed” product.
In an attempt to reduce these flaws of gross receipts taxes, Nevada’s applicable tax rate depends on the primary type of business being run, with the highest rate being 0.331% (for rail transportation), and the lowest being 0.051% (for mining). Nevada also offers limited deductions, and rules for how this tax interacts with other Nevadan taxes.
How the Commerce Tax Is Applied
The following steps should give a general understanding of how the law applies to one’s business:
1. Determine if you are a business entity. If so, proceed to step 2. If not, the tax is not applicable.
The following table provides a high-level overview of which entities are taxable “business entities”; the actual law is more specific in its reach.
• Most active and passive entities, whether incorporated or not, which run a business
• Includes holding companies
• Includes many entities disregarded for federal tax purposes that are engaged in business
• Any other person engaged in business
Not business entities
• Governmental entities
• Nonprofits and other entities supporting non-business interests, including many trusts
• REITS and REMICs
• Short-term exhibitors in Nevada
• Various passive income producing business and intangible investment-investors
2. Determine if you are “engaged in business” in Nevada. If so, proceed to step 3. If not, the tax is not applicable.
The law itself provides no guide to what “engaged in business” means. In borderline cases, U.S. Constitutional limits will apply to ensure a minimal level of connection between the business and Nevada.
3. Determine your business entity’s total gross revenue; do not consolidate or combine the gross revenue of multiple entities, but calculate this amount on a per-entity basis.
Generally, this includes all gross receipts, including the fair market value of property received or debts forgiven. It does not include, among other things, intellectual property income, discounted or complimentary transactions, certain nonrecognition provisions, income caused indirectly by reduced expenses, and things GAAP does not consider revenue.
4. Apply deductions to the total gross revenue.
Most passive income tends to be deducted. This includes most interest, dividends and distributions, distributive shares from partnerships, and income from “passive entities” (i.e., certain entities that do not actively conduct trades or businesses but make their money by investing in others, such as certain funds).
Similarly, entities receiving and distributing pass-through payments may deduct such payments. Pass-through payments are ones received by a business entity that must be distributed onto another person by law, fiduciary duty, certain reimbursement schemes, or certain contracts. Payments between affiliated entities may also be deducted.
Other deductions include those for hedging, expensed bad debts, amounts already taxed by other Nevada gross receipts taxes (which apply to gaming, mining, and insurance), and more.
5. Determine what gross revenue should be sourced to Nevada.
The sourcing rules are in the following table. If the taxpayer finds these sourcing rules do not fairly show his or her business in Nevada, Nevada’s tax department can authorize an alternative method.
Gross revenue type
• Real property-based
• Tangible personal property sales
• Tangible personal property rents and royalties
• Transportation services that both begin and end in Nevada
• Other revenue from business conducted in Nevada
• Location of real property
• Location of delivery of property
• Location of use or site of property
• Location where benefit of services used or received; alternative methods are possible with conditions
6. Apply $4 million standard deduction to the gross revenue sourced to Nevada.
7. Multiply your Nevada-sourced, post-deduction gross revenue times your applicable tax rate.
An entity’s applicable tax rate depends on its primary business category, i.e., the business category which generates the highest percentage of its Nevada-sourced gross receipts. There is a catchall category for businesses not specifically described by the law. The business categories and their tax rates follow:
• Accommodations, 0.2%
• Administrative and Support Services, 0.154%
• Agriculture, Forestry and Hunting , 0.063%
• Air Transportation, 0.058%
• Arts, Entertainment and Recreation, 0.24%
• Construction, 0.083%
• Educational Services, 0.281%
• Health Care and Social Assistance, 0.190%
• Finance and Insurance, 0.111%
• Food Services and Drinking Places, 0.194%
• Management of Companies and Enterprises, 0.137%
• Manufacturing, 0.091%
• Mining, Quarrying, and Oil and Gas Extraction, 0.051%
• Other Services, 0.142%
• Other Transportation, 0.129%
• Professional, Scientific, or Technical Services, 0.181%
• Publishing, Software, Data Processing, 0.253%
• Rail Transportation, 0.331%
• Real Estate Rental and Leasing , 0.25%
• Retail Trade, 0.111%
• Truck Transportation, 0.202%
• Unclassified Business, 0.128%
• Utilities & Telecommunications, 0.136%
• Warehousing and Storage, 0.128%
• Waste Management and Remediation Services, 0.261%
• Wholesale Trade, 0.101%
Related Issues and Interaction with Other Taxes
As noted above, certain other income taxed by Nevada will not be double-taxed by the commerce tax. Further, paying the commerce tax gives one a credit usable against Nevada’s recently revised payroll taxes, called the Modified Business Tax.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.