If 2021 was a historic year for state tax reform, then what does the future hold for new business taxes or tweaks to the current tax code as Nevada voters go to the polls in November to elect a new slate of lawmakers? Those lawmakers will take office in January when the legislature reconvenes.
In a major development last year, lawmakers approved a bill near the end the 81st Nevada Legislative session to create a new excise tax structure for the mining companies that’s expected to add almost $300m to the state’s education funding.
During the session, Assembly Bill 435 was also adopted. The bill expanded the commerce tax exemption to include trade shows and corporate meetings held in Nevada, regardless of whether the person is required to obtain a state business license.
The bill additionally clarified that an organizer, manager or sponsor of such an event or an exhibitor at such an event is authorized to claim the exemption.
“They expanded the list of exemptions last year,” said Mike Verville, tax partner with Eide Bailly LLP. “What you are going to see is companies with in-state payroll mitigate up to half of their commerce tax burden by applying it towards their modified business tax liability where employees outside of Nevada in multi-states can’t.”
Nevada’s commerce tax, a broad-based gross receipts tax, was signed into law by Republican Governor Brian Sandoval in 2015, about a year after voters rejected a margins tax on the 2014 ballot.
In 2021, the commerce tax accounted for 2.8 percent of total tax revenues, compared to 69 percent from sales and use taxes, while 3.5 percent is raised from the net proceeds of the minerals tax and 7.5 percent from the modified business tax.
The annual tax has been revised over the years, with it currently applying to any business that exceeds $4 million in revenue during a fiscal year. Senator Dina Neal, a Democrat, has said she doesn’t expect any legislation to be filed around the commerce tax next year.
Verville believed that lawmakers will “start chipping away at it,” beyond the modifications already made to the tax. “Nevada may need to address this issue,” Verville said.
While reform to several high profile taxes made news after the last session, lawmakers once again failed to pass a bill to implement a tax on digital goods.
So, what’s next when it comes to tax policy? Did passing a mining tax increase in the 2021 session kill away any momentum for new proposals being introduced in Carson City next year? Or, will some lawmakers try again to introduce similar tax bills that previously failed to pass out of committee?
Cindy Creighton, president of Nevada Taxpayers Association, said Bill Draft Request (BDR) information hasn’t been posted online yet but with a number of new members expected to be elected in November she wouldn’t be surprised if some of the previous issues will be rehashed, including proposals for a service tax or Nevada lottery.
In terms of taxes, Creighton said, “If it happens in another state, it will find its way to Nevada and vice versa”
Taxing Digital Goods
Among the tax proposals that fell short last year was a bill introduced by Senator Neal to tax digital goods. Despite four hearings on Neal’s tax measure, Senate Bill 346 never made it out of committee.
Because the proposed bill would have raised taxes, it needed to pass by a two-thirds majority in both houses of the Legislature.
“It was supposed to be in play last year, but it got stalled,” Verville said. “The question is, how is Nevada going to enforce it? I believe Nevada along with other states will pass a digital tax.”
This tax is usually a mix of gross receipt taxes and transaction taxes that apply at rates ranging from 1.5 to 7.5 percent on receipts from the sale of advertising space, provision of digital intermediary services such as the operation of online marketplaces, and the sale of data collected from users.
The bill would have created a digital goods tax that is like the state’s retail sales tax.
Nevada has a 6.85 percent sales tax rate, and a max local rate of 1.53 percent, with an average combined state and local sales tax rate of 8.23 percent.
Creighton said any digital goods tax “needs to be equitable” because it’s about taxing a product digitally at the same rate whether you are buying a book in a local shop or digitally.
Neal’s proposal would have imposed the tax on the sale of specified digital products, which includes digital audio works, digital audio-visual works, digital books, digital code and other digital products on businesses with $100,000 of gross revenues or 200 or more transactions within the state subject to the tax.
Creighton expects Neal to file a similar proposal when the 82nd Session of the Nevada Legislature convenes, which begins on February 6, 2023.
As Nevadans shopping habits continue to migrate online and away from that weekend trip to the local mall to buy a video game or book, some politicians believe the state’s tax policy must shift to collect tax from digital versions sold online.
Nevada’s sales tax code, which was approved decades ago by the legislature, is applicable only to the physical video game or book being sold in brick-and-mortar or online stores.
Digital versions of those products that a consumer might buy on Amazon or through iTunes isn’t included in the state’s sales tax regulations.
Proposals floated in the legislature also would have imposed a tax on streaming services like Hulu or Disney Plus, which aren’t currently subject to state tax. Analysts estimate a digital goods tax would generate $8 to $9 million in new revenue annually for the state general fund.
“The issue of taxing digital goods wasn’t one 20 years ago,” Creighton said. “We don’t go out anymore to the mall and buy books or CDs. We buy digital versions of these goods.”
Lawmakers and the retail industry in Nevada have been trying to find a solution to address the taxing of digital products. Nevada has modernized some of its tax statues, but taxation of digital goods remains difficult to get through both houses of the Legislature.
Effective Oct. 1, 2018, the Nevada Department of Taxation required remote sellers to collect sales tax. Remote sellers sell products to Nevada customers, regardless of whether the seller has a physical presence in the state.
Remote sellers are only required to register and collect Nevada sales or use tax if, in the previous or current calendar year, they have more than $100,000 of retail sales in the Silver State, or 200 or more separate retail transactions for delivery into the state.
The ability to begin collecting so-called remote seller taxes was made possible after the U.S. Supreme Court’s decision on June 21, 2018, in South Dakota versus Wayfair Inc. The high court ruled that states, including Nevada, could require remote sellers to collect taxes on sales of goods delivered to locations within their state.
“Wayfair was hit with sales tax in South Dakota for selling and not collecting sales tax and many other states are following the Wayfair decision,” Verville said.
Get Your Business Tax, DMV Fee Refunds
The Nevada Department of Taxation has successfully sent out its first round of Modified Business Tax refunds to 22,621 business taxpayers for the quarters ending September 30, 2019, through March 31, 2021, but millions of dollars more remain to be distributed.
This is the result of a ruling from the Nevada Supreme Court that found Senate Bill 551, passed by the legislature in 2019, unconstitutional. The justices ruled that the bill required a two-thirds vote in both houses pass.
“The department continued to work on getting all remaining refunds out in a timely manner,” said Eden Collings, a spokeswoman with the state Department of Taxation.
The department estimated that $80.3 million, which included interest, would need to be refunded to general businesses, financial institutions, and mining. As of January 24, 2022, Collings said they’ve refunded a total of $64,882,792.12.
“The remaining $15.4 million has either not been refunded to taxpayers due to the account being out of compliance or has been placed as a credit on taxpayer accounts due to out of date taxpayer contact information in some cases,” Collings said.
In some instances, Collings said, if an account had an existing tax liability, the credit was applied to that liability pursuant to Nevada law. If an account has a credit, the taxpayer may request a refund be issued for the amount of the credit.
The state Supreme Court also found unconstitutional a technology fee charged by the Nevada Department of Motor Vehicles (DMV). The DMV is issuing refunds of $1 to residents who paid the fee between July 1, 2020 and August 31, 2021.
Creighton got her refund when she visited the DMV. The refunds are paid in cash at DMV offices, and residents have until June 30, 2023, when the program ends.
Taxes on the 2023 Agenda
Verville didn’t expect “a lot of movement on tax policy,” in the coming year, beyond maybe updates to mining, cannabis and other niche taxes.
“Nothing on the radar dealing with general business, really,” Verville added.
Creighton agreed, saying even as local budgets are currently being reviewed, she didn’t expect any new tax proposals. She noted that at some point state lawmakers will have to have a “thoughtful conversation about broadening the tax base and reviewing exemptions.”
When asked if lawmakers would consider a tax on services, Creighton said she expected to see the, “issue to come up again but I haven’t heard anyone talking about it.”
Nevada politicians have debated the merits of a tax on services, which would apply to such services as haircuts and dry cleaning, several times over the last two decades but have not implemented the tax.
“I know they are looking at the exemptions in an effort to broaden the base,” said Creighton.
Verville moved beyond the legislative to offer an update on the benefits and challenges to the state’s Research and Development (R&D) Tax Credit and other tax incentives and abatement programs all of which are in place to attract new businesses to the state.
“Nevada has had some success attracting manufacturing and technology companies,” Verville said. “There are two recent actions that affect the R&D credit.”
He said companies rely on the R&D tax credit to help reduce the cost of research. The updates made by the Internal Revenue Service requires businesses to disclose components that relate to the R&D credit.
For each component: all research activities, the people performing the research, information the people sought to discover, total wages for the researchers, supply and contract expenses for the R&D credit.
The change also impacts research expenses that must now by amortized over five years. Prior to the change on January 1, taxpayers could elect to amortize research expenses or expense in the year incurred.
Nevada offers standard tax abatements designed to attract and expand businesses that generate at least 51 percent of their revenues outside of Nevada. These abatements are geared to attract jobs that pay above the state average hourly rate ($26.67/hr.) and encourage capital investment.
Three abatement programs provide reductions in sales and use tax, modified business tax, and personal property tax for a finite amount of time.
“We are pro business, and we have programs that may help reduce tax expenses with incentives and abatements,” Verville said. “In Nevada, qualifying tax incentives and abatements may reduce sales tax, modified business tax and property tax.”
Verville said the only thing that is missing for abatement is the Commerce Tax, but for a lot of these smaller businesses moving to Nevada it doesn’t have an impact.
“When trying to attract businesses to Nevada, it used to be all about location, location, location. It’s now all about employees, employees, employees,” Verville added.
