Nevada Enacts New “Commerce Tax” Into Law

Effective on July 1, 2015, Nevada S.B. 483 imposes an annual commerce tax on business entities engaged in business in Nevada, whose ‘Nevada gross revenue’ in a taxable year exceeds $4,000,000.[1] For this purpose, the tax year is a static twelve-month period running from July 1 through June 30 of the following year, regardless of the taxpayer’s accounting year end.[2]

What is taxed?

The Commerce Tax is levied on businesses’ Nevada gross revenue in excess of $4 million per year, less certain subtractions including distributions from pass-through entities, stock proceeds, bad debts expensed on federal taxes, and net income from a passive entity to the extent that income was generated by another business entity.[3] Gross revenue is defined as the total amount realized by a business entity from engaging in a business in Nevada that contributes to the production of gross income.[4] There is no deduction for cost of goods sold or other expenses incurred.[5] Sectors already paying gross receipts taxes (gaming, mining, and insurance) can exclude from the Commerce Tax any revenue subject to those taxes.[6]

Exclusions from gross revenue are:[7]

  • amounts realized from the sale, exchange, disposition or other grant of the right to use trademarks, trade names, patents, copyrights and similar intellectual property
  • the value of cash discounts allowed by the business entity and taken by a customer
  • the value of goods or services provided to a customer on a complimentary basis
  • amounts realized from a transaction subject to, described in, or equivalent to, IRC section 118, 331, 332, 336, 337, 338, 351, 355, 368, 721, 731, 1031 or 1033, regardless of the federal tax classification of the business entity under 26 C.F.R. § 301.7701-3
  • amounts indirectly realized from a reduction of an expense or deduction
  • generally, the value of property or services donated to an IRC 501(c)(3) entity
  • amounts that are not considered revenue under generally accepted accounting principles.
Who is required to file?

All business entities engaged in business in Nevada are required to file a Commerce Tax Return, even if there is no tax liability, unless the business qualifies for an exemption. Entities organized in other states that are engaged in business in Nevada are also subject to the Commerce Tax.

The term “business entity” is defined broadly 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.”[8] Natural persons are included as business entities to the extent they are required to file a Form 1040 Schedule C (Profit of Loss from Business), Schedule E (Supplemental Income and Loss), or Schedule F (Profit or Loss from Farming).[9]

Although the definition of “business entity” is broad, there are notable exceptions, including, among other things:

  • Real estate investment trusts (with certain exceptions) and real estate mortgage investment conduits
  • Entities with Nevada activities that are confined to owning, maintaining, and managing certain types of intangible investments
  • Entities defined as passive entities under the statute, which appear to be roughly analogous to so-called “investment partnerships” under Illinois and California laws[10]
  • Not-for-profit organizations that qualify as tax-exempt under IRC Section 501(c)(3)[11]
  • Passive entities, for purposes of the Nevada commerce tax, are defined as limited liability companies, partnerships, or trusts (other than a business trust) that, during the tax period, generated at least 90 percent of their federal gross income from investment-type activities. Rent specifically is excluded from the types of income that would qualify under the 90 percent test.[12]

Each separate entity must file its own Commerce Tax Return – there is no provision for consolidated returns.[13] Simplified reporting is available for entities with less than $4,000,000 gross Nevada revenues for the year; and, returns can be filed online.[14]

What is the tax rate?

The Commerce Tax divides Nevada’s economy into 26 business categories, each consisting of one or more industry classifications as delineated under the North American Industry Classification System (NAICS).[15] Each business category is assigned its own gross receipts tax rate as indicated in the following table, with rates ranging from 0.051 percent to 0.331 percent.[16] Businesses which do not fit into any other category are taxed at the 0.128 percent rate for Unclassified businesses.[17]

A taxpayer’s initial Commerce Tax report must designate the business category in which the taxpayer is primarily engaged.[18] A taxpayer is ‘primarily engaged’ in the business category in which the highest percentage of its Nevada gross revenue is generated.[19] A taxpayer may not change its business category without the Department of Taxation’s approval.[20]

Business Category Rate Business Category Rate
Agriculture, Forestry, Fishing, and Hunting 0.063% Finance and Insurance 0.111%
Mining, Quarrying, and Oil and Gas Extraction 0.051% Real Estate and Rental and Leasing 0.250%
Utilities and Telecommunications 0.136% Professional, Scientific, and Technical Services 0.181%
Construction 0.083% Management of Companies and Enterprises 0.137%
Manufacturing 0.091% Administrative and Support Services 0.154%
Wholesale Trade 0.101% Waste Management 0.261%
Retail Trade 0.111% Educational Services 0.281%
Air Transportation 0.058% Health Care and Social Assistance 0.190%
Truck Transportation 0.202% Arts, Entertainment, and Recreation 0.240%
Rail Transportation 0.331% Accommodation 0.200%
Other Transportation 0.129% Food Services and Drinking Places 0.194%
Warehousing and Storage 0.128% Other Services 0.142%
Publishing, Software, and Data Processing 0.253% Unclassified 0.128%
When is the filing deadline?

Nevada Commerce Tax reports are due on or before the 45th day following the end of that taxable year.[21] Taxpayers may request a 30-day extension to pay the tax. No penalty is assessed for payment during the 30-day period.[22] Thus, the due date for all business entities would appear to be August 14th, with an extension potentially available to September 13th (with interests).

For this first tax year, there is a grace period until Feb. 15, 2017 to file and pay the tax.[23] Penalties and late charges may be waived if the return is filed and the amount due is paid during the grace period if there is good cause for being late (i.e., the failure occurred despite the exercise of ordinary care and was not intentional or due to willful neglect).[24] Waivers will be determined on a case-by-case basis.

 

[1] S.B. 483, Sec. 20.1.

[2] Id. at Sec. 12.

[3] Id. at Sec. 21.1(a).

[4] Id. at Sec. 8.1.

[5] Id.

[6] Id. at Sec. 21.1(a).

[7] Id. at Sec. 8.3.

[8] Id. at Sec. 4.1.

[9] Id. at Sec. 4(2)(b).

[10] See Cal. Rev. & Tax. Code § 23040.1; 35 Ill. Comp. Stat.5/1501(a)(11.5).

[11] S.B. 483, Sec. 4.

[12] Id. at Sec. 14.

[13] S.B. 483, Sec. 11.1(f). (Although required to file separately, proposed regulations have been drafted which are intended to modify the meaning of an “affiliated group” under the MBT to “allow for [a] payroll provider to take a Commerce Tax Credit toward affiliated group MBT Liability.” Proposed Regulation of the Nevada Tax Commission, is available at http://tax.nv.gov/uploadedFiles/taxnvgov/Content/FAQs/Regulations percent20Draft percent209 percent208.pdf (last accessed Aug 22, 2016), amending Financial Institutions & Business Tax, Nev. Rev. Stat. §363(a),(b). This amendment would define an “affiliated group” for MBT purposes as determined for federal income tax purposes under IRC §§1504(a) or 1563(a)(2) and the associated federal consolidated return regulations (Treas. Regs. §1.1502-1, et seq.). However, there appears to be a discrepancy between the 80 percent common ownership required under IRC §1504(a) for affiliation and the 50 percent common ownership of an “affiliated group” for Nevada purposes described in S.B. 483. If adopted, the definition of an “affiliated group” under the Commerce Tax would be different than the definition under the MBT and this could lead to the possibility that an affiliated group under the Commerce Tax would not be allowed to use its Commerce Tax credits to offset MBT liability under different percentage affiliation rules. In order to qualify under the disparate rules, the affiliated group would have to be 80 percent commonly controlled to benefit from credits generated from an affiliate).

[14] Nevada Department of Taxation, Commerce Tax Questions and Answers. available at http://tax.nv.gov/Commerce/Return_PaymentFAQs/ (last accessed Aug 22, 2016).

[15] Id. at Sec. 23.

[16] Id. at Secs. 24 through 49

[17] Id. at Sec. 49.

[18] Id. at Sec. 20.3.

[19] Id.

[20] Id.

[21] Id. at Sec. 20.

[22] Id.

[23] Nevada Department of Taxation, Commerce Tax Questions and Answers. available at http://tax.nv.gov/Commerce/Return_PaymentFAQs/ (last accessed Aug 22, 2016).

[24] Id.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City. Read My Full Bio

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