Tax Alert – Nevada Commerce Tax

On June 10, 2015, Governor Brian Sandoval signed into law SB 483 known as the commerce tax. The law is effective as of July 1, 2015. As part of this law, the Nevada business tax on payroll was increased from 1.17% to 1.45%. The business tax is paid every calendar quarter on the  amount of payroll in excess of $50,000 (previously $85,000).

Key Points:

The commerce tax is based on gross revenue less a $4,000,000 exemption. The revenue is determined based on the federal tax accounting method of the business. The tax is due  regardless of the profitability of the business.

Revenue received by a business entity that is mandated by contract or subcontract to be distributed to another person or entity is deducted from gross revenue. In addition, SB 483 provides various deductions from gross revenue including interest, dividends from corporations, sale of property used in a trade or business (Section 1231 property), certain income from a passive activity, income from pass-through entities, and other items as described in the law.

The rate of tax depends upon the primary business category. The construction industry is subject to a rate of 0.083%. The manufacturing industry is subject to a rate of 0.091%. The wholesale trade industry is subject to rate of 0.101%. The tax year for all businesses has been defined as July 1 through June 30 of the following year. This is regardless of the normal year end for the business. Due to this, any business without a June 30 year end will be required to calculate its gross receipts (using the federal tax method of the business) based on a June 30 year end in order to report its commerce tax liability.

The tax is due 45 days after June 30, which will be August 14th for all businesses. The first required payment will be due August 14, 2016. For “good cause”, a 30 day extension (September 13) for payment of this tax may be granted, however interest will apply. The commerce tax applies to Nevada receipts only. The law addresses the definition of Nevada gross receipts.

One-half of the commerce tax paid by the business is allowed as a credit against it business tax on payroll in the following four calendar quarters immediately following the end of the taxable year for which the commerce tax was paid. If this credit is not fully utilized in the following four calendar quarters, it does not carry over and is of no future benefit.

The annual business license fee has increased from $200 to $500 (for most businesses). This includes foreign corporations registered to do business in Nevada. As an example, assume the following facts: Contractor with $10,000,000 in Nevada gross receipts using its current federal tax accounting method for the period July 1, 2015 through June 30, 2016. Contractor pays subcontractors $1,500,000 over this period. Assume none of its gross receipts are exempt.

The commerce tax liability would be $3,735 ($10M less $1.5M less $4M multiplied by 0.083%). A tax credit of $1,867.50 would then be available to offset its business tax on payroll for any of the four calendar quarters immediately following the end of the taxable year for which the commerce tax was paid. Any credit not used by the last quarter ending June 30, 2017 would not carry over.

Analysis:

In addition to the added burden of the commerce tax, all businesses that are subject to this tax will incur the added expense and time to calculate gross receipts and any allowed deductions using the required fiscal year of July 1 to June 30. It should also be noted that the federal tax accounting method of the business is required to be used for this calculation. Since most businesses do not have a June 30 year end, this will be in addition to your normal year end close. We are ready to assist you with this new law and to minimize the financial as well as the administrative impacts of the commerce tax.

For additional information, please call us. You may also refer to this website which provides additional details: http://taxfoundation.org/article/nevada-approves-new-tax-business-gross-receipts