New Nevada Commerce Tax Effective July 1, 2015

by K&L Gates LLP
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While not purporting to give specific advice on Nevada tax law, the following is a summary of some of the general principals underlying the new tax law. A new Nevada Commerce Tax (“NCT”) was signed into law by Nevada Governor Brian Sandoval on June 10, 2015. The NCT will go into effect on July 1, 2015, and the first NCT returns will be due on June 30, 2016. 

Overview of the NCT
The NCT is a gross receipts tax imposed on each business entity engaging in business in Nevada whose Nevada gross revenue exceeds $4,000,000 in a taxable year. The applicable tax rate is based on the industry in which the business entity is primarily engaged. Any person engaged in a business is considered a business entity, including natural persons required to file with the Internal Revenue Service a Schedule C, Schedule E, or Schedule F on their Form 1040. The term “engaging in business” means commencing, conducting, or continuing a business, and the liquidation of such a business.

Every business entity engaging in business in Nevada during the taxable year (the 12-month period beginning on July 1 and ending on June 30) is required to file a tax return within 45 days after the end of the taxable year, regardless of whether the business entity’s Nevada receipts exceed the $4,000,000 threshold.

Exclusions and Deductions:
Like other traditional gross receipts taxes, the NCT does not provide a deduction for the cost of goods sold or other expenses incurred that contribute to the production of income, including, without limitation, the fair market value of any property and any services received, and any debt transferred or forgiven as consideration. Unlike a traditional gross receipts tax, the NCT provides for numerous exclusions and deductions. The NCT provides for exclusions based both on taxpayer status and type of revenue generated.

Status-Based Exclusions
Status-based exclusions from the NCT (arising because of limitations to the definition of “business entity”) include the following (subject to additional qualifications):

  • Persons or entities Nevada is prohibited from taxing pursuant to the U.S. or Nevada Constitutions;
  • Natural persons not required to file with the Internal Revenue Service a Schedule C, Schedule E, or Schedule F on their Form 1040;
  • Governmental entities;
  • Tax-exempt organizations that qualify under 26 U.S.C. § 501(c);
  • Credit unions;
  • Grantor trusts;
  • Estates of natural persons;
  • Real estate investment trusts;
  • Real estate mortgage investment conduits;
  • Trusts qualified under 26 U.S.C. § 401(a);
  • Passive entities;
  • Persons whose activities within Nevada are confined to ownership, maintenance, and management of intangible investments of such persons or certain statutory trusts or business trusts; and
  • Persons who take part in exhibitions held in Nevada, but are not required to obtain Nevada business licenses.

Exclusions from Taxable Revenue
The NCT also excludes certain types of revenue from the NCT base (arising because of limitations to the definition of “gross revenue”), including the following (subject to additional qualifications):

  • Amounts realized from the sale, exchange, disposition, or other grant of the right to use intellectual property;
  • Cash discounts;
  • Complimentary goods or services;
  • Amounts realized from transactions subject to, described in, or equivalent to the following sections of the Internal Revenue Code (“IRC”): 118, 331, 332, 336, 337, 338, 351, 355, 368, 721, 731, 1031, or 1033;
  • Amounts indirectly realized from a reduction of an expense or deduction;
  • Donations to tax-exempt organizations that qualify under 26 U.S.C. § 501(c)(3); and
  • Amounts that are not considered revenue under generally accepted accounting principles.

Deductions
In computing their NCT liability, taxpayers may deduct the following from their Nevada gross revenue (subject to additional qualifications):

  • Gross revenue Nevada is prohibited from taxing pursuant to the U.S. or Nevada Constitutions;
  • Gross revenue attributable to dividends and interest upon bonds or securities of governmental entities;
  • Gross receipts used to determine license fees pursuant to NRS 463.370;
  • Gross proceeds used to determine the excise tax on net proceeds from mineral extraction and royalties pursuant to NRS 362.100 to 362.240;
  • An amount equal to excise tax paid under chapter 369 of NRS (relating to alcohol);
  • Amounts related to the taxes and fees imposed pursuant to chapter 680B of NRS (related to insurance);
  • The amount of the premiums used to determine the taxes imposed pursuant to NRS 694C.450 and 685A.180 (related to captive insurers and nonadmitted insurance);
  • Amounts received from a health care provider (this deduction is limited to 50 percent of the amounts received if the business entity is a health care provider that is a health care institution);
  • For employee leasing companies, amounts received from clients for wages, payroll taxes on those wages, employee benefits, and workers’ compensation benefits for employees leased to the client company;
  • Pass-through revenue (including certain advances and reimbursements and revenue received by a business entity that is part of an affiliated group from another member of the affiliated group);
  • Tax basis of securities and loans sold by the taxpayer, as determined for federal income tax purposes;
  • Revenue derived from the operation of a facility located on property owned or leased by the federal government and managed or operated primarily to house members of the U.S. Armed Forces;
  • Interest income other than interest on credit sales;
  • Dividends and distributions from corporations, and distributive or proportionate shares of receipts and income from a pass-through entity;
  • Receipts from the sale, exchange, or other disposition of an asset described in sections 1221 or 1231 of the IRC, without regard to the length of time the taxpayer held the asset.
  • Receipts from hedging transactions;
  • Receipts from loan repayments;
  • The principal amount received under a repurchase agreement or loan;
  • Proceeds received from the issuance of the taxpayer’s own stock, options, warrants, put calls, from the sale of the taxpayer’s treasury stock, or as contributions to the capital of the taxpayer;
  • Proceeds received from insurance policies (unless for the loss of business revenue);
  • Litigation damages (to the extent such damages would not have been considered gross receipts for purposes of the NCT if received without litigation);
  • Bad debts expensed for federal income tax purposes;
  • Returns and refunds;
  • Amounts received from the sale of an account receivable (to the extent receipts from the underlying transaction are excludable from gross receipts); and
  • Amounts received from a passive entity in which the taxpayer owns an interest (but only to the extent the net income of the passive entity was generated by the gross revenue of another business entity).

Apportionment and Sourcing:
Only gross revenue sitused to Nevada is subject to the NCT. The manner in which revenue is sitused to Nevada depends upon both the type of property and type of transaction involved in generating such revenue.

Real Property: Revenue generated from the sale or lease of real property is sitused to Nevada if the real property is located in Nevada.

Lease of Tangible Personal Property: Gross revenue from the lease of tangible personal property is sitused to Nevada to the extent the property is located or used in Nevada.

Sale of Tangible Personal Property: Gross revenue from the sale of tangible personal property is sitused to Nevada if the property is delivered or shipped to a buyer in Nevada, regardless of the F.O.B. point or any other condition of sale.

Transportation Services: Gross revenue from the sale of transportation services is sitused to Nevada if both the origin and the destination point of the transportation are located in Nevada.

Sale of Services: Gross revenue from the sale of services is sitused to Nevada in the proportion that the purchaser’s benefit in Nevada bears to the purchaser’s benefit everywhere. The physical location at which the purchaser of a service ultimately uses or receives the benefit of the services that was purchased is paramount in determining the proportion of the benefit in Nevada to the benefit everywhere.

Catch All: If not specifically described under one of the situsing rules described above, gross revenue is sitused to Nevada if the gross receipts are from business conducted in Nevada. The physical location of the purchaser is paramount in determining if business is conducted in Nevada.

If the above situsing rules do not fairly represent the extent of the business conducted in Nevada, the Nevada Department of Taxation may authorize the taxpayer to use an alternative method of situsing.

NCT Rates
The rate of the NCT ranges from 0.051 percent to 0.331 percent, depending upon the business category in which the taxpayer is “primarily engaged.” If a taxpayer is engaged in business in more than one business category, the taxpayer is “deemed to be primarily engaged in the business category in which the highest percentage of its Nevada gross revenue is generated.” The taxpayer must designate the business category in which it is primarily engaged on its first return and may not change its business category designated without formal approval from the department. The NCT sets forth 26 possible business categories, each corresponding with at least one NAICS category, with rates ranging from 0.051 percent to 0.331 percent. If a taxpayer’s business does not fit into any of the specific business categories, then its Nevada receipts will be taxed under either the “other service” category at a 0.142 percent rate or the “unclassified” business category at a 0.128 percent rate.

Business Category

Tax Rate

Rail transportation

0.331%

Educational services

0.281%

Waste management and remediation services

0.261%

Publishing, software, and data processing

0.253%

Real estate and rental leasing

0.250%

Arts, entertainment, and recreation

0.240%

Truck transportation

0.202%

Accommodation

0.200%

Food services and drinking places

0.194%

Health care and social assistance

0.190%

Professional, scientific, and technical services

0.181%

Administrative and support services

0.154%

Other services

0.142%

Management of companies and enterprises

0.137%

Utilities and telecommunications

0.136%

Other transportation

0.129%

Warehousing and storage

0.128%

Unclassified

0.128%

Retail trade

0.111%

Finance and insurance

0.111%

Wholesale trade

0.101%

Manufacturing

0.091%

Construction

0.083%

Agriculture, forestry, fishing, and hunting

0.063%

Air transportation

0.058%

Mining, quarrying, and oil and gas extraction

0.051%

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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