Margin Tax Limbo Likely

Posted on by & filed under Nevada by the Numbers Blog.

It is common knowledge that the margin tax, if passed by voters in November, will require most Nevada businesses whose total annual revenue exceeds $1 million to pay a tax of two percent of their taxable margin. What may not be commonly known is that businesses will be in decision-making limbo for at least some of the 15 months between January 1, 2015 and April 1, 2016.

The taxation and administrative no-man’s-land will exist because — although the provisions of the new tax will be in effect as we ring in the new year in 2015 — the Department of Taxation and the Tax Commission will have until March 2016 to adopt guidelines and regulations, as well as to design and implement the technical systems that will be necessary to administer the new tax.

Even under the most optimistic set of potential timelines, it is unlikely that the rules and regulations can be drafted, reviewed, opened for public comment, revised, and then adopted by the Legislative Commission much before mid-year 2015. This means that for the early part of 2015 and possibly longer, businesses will lack some of the information they need to make cost-cutting and tax-reducing decisions about operations. In short, for a period of many months, businesses won’t know what they don’t know, and neither will anyone else in the state.

Even once the rules are adopted and formalized via the Nevada Administrative Code (NAC), businesses may find — just as has happened in Texas with the margin tax — that conflicts between rules and regulations and the wording and intent of the initiative cause confusion and questions. Such matters will require discussion, examination and oversight and could result in challenges to NAC rules by aggrieved business entities.

In Texas, for example, disputes over what can and should be included in the “cost of goods sold” deduction resulted in a flurry of lobbying activity and subsequent fights with the Comptroller’s office. The Comptroller amended some rules under intense pressure from the business community, while standing by others — which prompted objecting business owners to sue. Some of those fights continue in the Texas courts today.

Although the Legislature cannot amend the margin tax measure for three years after it takes effect, it is possible the battle over NAC rules and guidelines will begin in 2015 and create a de facto amendment process that goes on for many years.

This post also appears in the March issue of Stat Pack, an economic newsletter that provides important data about Southern Nevada and is published monthly as a joint project of RCG Economics and HighTower Las Vegas.