Question 3 on Nevada’s statewide ballot in November will set before voters a tax initiative that would impose a two percent margin tax on certain business entities.
The consultant team of RCG Economics and economists Dr. Alan Schlottmann and Eugenia Larmore were asked by the Coalition to Defeat the Margin Tax Initiative to conduct an analysis and report on the potential impact of the proposed margin tax. The report addresses total annual tax yield, impact to business entities, and a representative array of case studies.
It is important to note that the tax initiative contains a critical concept (and related definitions) necessary for understanding the impact of implementation, namely the identification of “affiliated groups”. These are defined as two or more business entities sharing controlling ownership. Where controlling ownership by multiple entities results in annual revenues of greater than $1M, the affiliated group is considered one entity for purposes of the proposed margin tax.
The RCG report extends and updates previous estimates of the total revenue yield from the proposed margin tax by utilizing new Nevada data on affiliated groups. Using this approach, it appears that the proposed margin tax would generate nearly $800,000,000 in annual taxes on Nevada businesses.
Nevada business entities (as defined by Question 3) that would be affected by the proposed margin tax employ nearly 608,000 workers. This number represents 63% of all private establishment employees in the state in 2013. (In the initiative, “establishment” is defined as stand-alone businesses that do not share controlling interest with other businesses.)
When considered on a per employee basis, the margin tax would be equivalent to $1,314 per private sector employee per year.
Nevada’s top five industries with the highest annual margin tax estimate include:
1. Retail Trade: $109.3M total margin tax/year
2. Finance and Insurance: $98.5M
3. Health Care and Social Assistance: $95.9M
4. Wholesale Trade: $90.6M
5. Utilities: $63.4M
An important part of the RCG analysis is the inclusion of a set of case studies that illustrate the margin tax liability for different types of entities. The 13 case studies used in the report are based on actual information developed by the Las Vegas-based CPA firm of Fair, Anderson & Langerman for a set of its clients.
The wide variation in implied income tax equivalence (i.e., the percentage of tax on net income) is striking. Of the case studies included in the RCG report, the tax on net income would vary between a low of 2.5% and a high of 82.1%.
Exemptions to the tax would include:
- natural persons not engaged in business;
- entities with total revenue of $1,000,000 or less;
- passive entities;
- Section 501 (c) organizations.
Note: The administrative definition of “passive entities” would be crucial to how the margin tax would affect numerous industries including real estate. For information on the definition of passive entities in the franchise tax in Texas – the only state tax with a similar structure to the margin tax proposed in Question 3 – click here.
As defined in the initiative, “margin” is the lesser of:
(1) 70 percent of the entity’s total revenue from its entire business; or
(2) entity’s total revenue from its entire business, minus (at its election) the cost of goods it has sold or the amount of compensation it has paid to owners and employees.
An entity’s taxable margin, against which the tax is imposed, would be that part of its margin apportioned to Nevada. Liability for the margin tax would begin to accrue on January 1, 2015.
Click here to read or print the full text of the initiative.