Nevada is one of the most business-friendly states in the nation. The key to utilizing Nevada’s Selected Business Assistance Programs and utilizing the tax breaks offered lies in understanding the subtle complexities of the state’s otherwise simple tax system.
Look at the incentives: Nevada is just an all-around great place to start a business. There’s no corporate income tax, no personal income tax, no franchise tax on income and no inheritance or gift tax. There’s no admissions tax, unitary tax or estate tax and the state has competitive sales and property tax rates.
During the 2003 Legislature, budget shortfalls totaling around $1 billion had to be addressed. During that session and the special sessions that followed, changes were made to Nevada’s tax system. The following article looks at the state’s present tax structure, as well as its incentives program, a comprehensive, pro-business package designed to attract new companies to Nevada and to encourage growth in existing firms.
Incentives for Businesses
Sales and Use Tax Abatement
Nevada offers an abatement of sales and use tax on eligible machinery and equipment. Businesses must have operations consistent with Nevada’s plan for economic diversification and development, and qualifying criteria include a commitment to doing business in Nevada, minimum job creation, employee health plans and wage requirements.
Sales Tax Deferral
This program allows qualified industries to defer sales tax interest-free for up to five years on purchases of specific types of capital equipment in excess of $100,000.
Sales Tax Exemptions
Some aircraft involved in air transportation can be exempted from taxes imposed on gross receipts from the sale of aircraft and major aircraft components.
Personal Property Tax Abatement
Like the Sales and Use Tax Abatement, this abatement is available to businesses with operations consistent with Nevada’s state plan for economic diversification and development, and carries the same qualifying criteria.
Property Tax Abatement
Abatement for both real and personal property tax is available for qualified recycling businesses. If at least 50 percent of the material or product is recycled on the site, 50 percent of real and personal property tax can be abated for up to 10 consecutive years.
Property Tax Exemptions
The following items are exempt from property tax:
C All personal property stored, assembled or processed for interstate transit;
C All raw materials and supplies utilized in the manufacturing process;
C Inventories held for sale within Nevada;
C All real and personal property that qualifies and is used for the purpose of air and/or water pollution control.
Industrial Development Bonds
The state is authorized to use tax-exempt industrial development bonds in order to provide low-interest financing of new construction, improvements, rehabilitation or redevelopment of qualified projects. Manufacturing facilities and certain other projects organized under Section 501 of the Internal Revenue Service code are qualified projects.
Renewable and Energy Storage Abatements
Companies producing energy from renewable resources such as wind, solar and other sources, or facilities producing energy storage devices can access a package of abatements available including sales/use tax and property tax abatements.
Information on Nevada’s selected business assistance programs can be accessed through the Nevada Commission on Economic Development’s (NCED) website, expand2Nevada.com, or by contacting the commission directly. To make application for the exemptions or abatements, businesses apply to NCED through their local economic authority. The application may be reviewed by the state’s Department of Taxation before it’s passed on to NCED.
Information on incentives and taxes is available through the economic development authority in each Nevada county, through NCED or through the Small Business Administration at sba.gov.
The Tax System in 2004
Even a pro-business state needs taxes in order to generate revenue, and the 2003 Legislature made several changes to the state tax system.
Business License Requirements
Approved by the 20th special session of the Nevada Legislature and effective in July 2003, all companies doing business in Nevada must obtain a state business license. The requirement was expanded to include sole proprietors and all businesses organized pursuant to Title 7 of Nevada Revised Statutes (NRS). This includes all occupations, but does not include governmental entities, nonprofit or religious organizations, charitable or fraternal organizations. The state business license fee was increased to $100, with an annual $100 renewal. Use-tax registration is mandatory for any business that purchases tangible personal property for storage, use or other consumption in Nevada.
Live Entertainment Tax
Also approved during the 2003 special session, this tax is administered by both the Gaming Control Board (for events taking place at gaming establishments) and the Department of Taxation (for events in other venues). The tax rate is two-tiered. At a facility with a seating capacity less than 7500, the rate is 10 percent, applying also to all food, drink and merchandise sold at the facility. A 5 percent rate on admission fees only applies to facilities with seating capacities of at least 7500. The tax does not apply to non-gaming venues with less than 300 seats.
Real Property Transfer Tax
This tax is collected by the county recorder when an interest in real property is conveyed. The rate varies among counties, but the Legislature added $1.30 per $500 of value to the rate levied on the transfer of real property, to be used by the state of Nevada, in addition to the rates already established for local revenues. The basis for the tax is the actual selling price or estimated market value of the property.
Modified Business Tax
The Modified Business Tax (MBT) went into effect in Nevada on October 1, 2003. Every employer subject to Nevada Unemployment Compensation Law is subject to this tax. This is a quarterly payroll tax, calculated on the total gross wages reported and paid by the employer for each quarter. Rates are currently 0.7 percent for general employers and 2 percent for financial institutions, with an allowable deduction for qualified health insurance/health benefit plans paid for by the employer. In July 2004, the tax rate for general employers drops to 0.65 percent. Some organizations are exempt from this new tax, including nonprofit, religious, charitable, fraternal and other organizations that qualify as tax-exempt.
The MBT replaces the so-called “head tax” that was enacted in July 1991, which imposed a tax of $25 per employee per quarter. That tax was repealed October 1, 2003.
The MBT was passed by the Legislature in an effort to broaden the tax base and make the state less dependant on gaming and sales taxes, according to Tim Rubald, director of business development at NCED. It should bring in significantly more income. Looking at gross wages rather than a straight $100 tax per year per employee, 0.7 percent of the average statewide wage of $15.80/hour is approximately 2.5 times the revenue.
The question arises, however, as to whether instituting a tax based on gross payroll will discourage high-paying, high-volume companies from locating in Nevada – exactly the type of employers the state wants to attract. The idea of a tax that grows as payroll grows might seem to penalize companies that pay well and hire large numbers of employees.
“One of my personal frustrations and that of members of the association is that the state has been working very hard on economic development, and one of the stated objectives of economic development has been higher-paying jobs,” said Carole Vilardo, president of Nevada Taxpayers Association. “And then we turn around and create this tax. On the one hand, we say ‘Come in with your high-paying jobs, and by the way, we’re going to tax you on gross payroll’.” Allowances for a reduction in the MBT will not take effect until July 1, 2005, so it will be nearly two years before high-paying companies get their initial first five years’ reduction in tax liability.
Is it a strike against us with businesses looking to locate in our state? Not for most companies looking to relocate in Nevada, according to Bob Shriver, executive director of NCED. For most, their current taxes are significantly higher than what they’d be paying here.
Chuck Alvey, president and CEO of Economic Development Authority of Western Nevada (EDAWN) has seen very little negative impact from the imposition of MBT. Most businesses haven’t mentioned it, but when EDAWN was working on its Business Builders survey, some businesses reported that if the tax rate were to increase or if the state added further taxes, they’d consider looking to locate elsewhere. “Are they bluffing? That’s anybody’s guess,” said Alvey.
“From a tax standpoint, Nevada is still a pretty good deal compared to our competitors,” said Rubald. There are only five states without personal income tax and a handful without corporate income tax. Sometimes it’s a matter of semantics, he pointed out. “Texas says they don’t have a corporate income tax, but they have a franchise fee based on the net income of the corporation. That’s what an income tax is.”
