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Tax task force down to wire

Anne Knowles

The Governor’s Task Force on Tax

Policy in Nevada will meet one final time

this week, just days before it is scheduled

to deliver a lengthy report outlining a

comprehensive tax plan for the state.

The eight-member panel last week

passed a motion to include a so-called

transaction tax that would place a levy on

various amusements and entertainment.

But the motion was for a tax only on spectator

entertainment such as movies and

not participatory events such as health

club memberships. As a result, the motion

passed by a vote of five to two because several

members felt the restrictions watered

down the proposal. Panel member Russ

Fields, president of the Nevada Mining

Association, was absent.

But the most contentious moments

came with discussion of the gross receipts

tax, now called the state activity tax or

SAT.

Task force member Eva Garcia-

Mendoza, a partner in Garcia-Mendoza &

Snavely in Las Vegas, asked to clarify

whether the gaming industry would be

subject to the SAT because it had been

suggested by members of the task force

that the casinos pay the .25 percent tax to

the Gaming Commission, which already

collects taxes imposed on gaming, rather

than to the Department of Taxation.

That would effectively raise the existing

6.25 percent gaming tax to 6.50 percent,

rather than levy a new .25 percent gross

receipts tax against the industry.

But the definition of taxable gaming

wins in the existing tax statutes and the

definition of gross receipts in the proposed

tax differ, and as result the gaming industry

would end up paying less than .25 percent

on its gross receipts, argued Garcia-

Mendoza.

Task force member Mike Sloan, senior

vice president of Mandalay Resort Group,

countered that the costs of administering a

new tax on the casinos would outweigh any

discrepancies in the amount the casinos

paid. And Jeremy Aguero, principal analyst

with Applied Analysis in Las Vegas and

head of the task force’s technical working

group, said the difference in the amount of

tax collected from gaming would be negligible,

whether the tax department collected

it or the gaming commission did.

Despite the disputes on last-minute

details, the bulk of the report and proposal

is complete. And one thing is certain: The

task force will recommend a quarter percent

gross receipts tax on the state’s businesses.

The SAT is the cornerstone of the task

force’s proposal, intended to raise the bulk

of revenue needed to cover the state’s gaping

budget shortfall estimated to be

between $2.6 billion and $4.6 billion over

the next 10 years.

From the beginning, however, the tax

has drawn criticism from the business community.

From the Asian Chamber of

Commerce in Las Vegas to The NBF

Group Inc., a debt collector in Carson City,

witnesses testifying before the panel have

lambasted it.

“As a business owner I don’t want to see

any tax at all,” said Quinn Ahrens, president

and CEO of Xoc Corp., a Renobased

technology company. “And a gross

receipts tax doesn’t take into account the

margins of a business.”

That has been the argument against the

tax from the beginning. The business community

maintains that a gross receipts tax is

inherently unfair: Two businesses, both

generating $1 million in annual revenue,

would pay the same tax even though one

business, working on a 1 percent margin,

netted only $10,000, while the other business,

operating on 20 percent margins,

made $200,000.

On the other hand, proponents of the

tax say it is far more stable and easier to

administer than any of its alternatives.

The primary alternative, in terms of a

broad, business-related tax, is an income

tax. The Nevada constitution prohibits a

personal income tax on individuals, but not

a corporate income tax on business.

But the panel has rejected that idea.

That’s because a corporate income tax goes

hand in hand with a personal income tax,

according to Richard Davis, president of

the Washington Research Council in

Seattle.

“It is almost impossible to implement a

corporate income tax without a personal

income tax,” said Davis. “A corporate

income tax is too volatile and a personal

income tax provides a stabilizing balance. It

also prevents raising the corporate income

tax too high.”

As proof, Davis said that all states that

have a corporate income tax couple it with

a personal income tax.

Washington, for example, like Nevada,

has no personal income tax. It is also the

only state that has a gross receipts tax,

called the business-and-occupation tax.

Davis said that Washington businesses uniformly

hate the B&O tax, which began in

the 1930s.

“But the reason we’ve had the B&O tax

for so long is people hate it until they look

at the alternative,” he said.

“The B&O tax in theory is a really

lousy tax. But if you keep the rate low it is

an endurable tax.”

The unappealing alternative is the pair

of income taxes corporate and personal.

But in Washington, as in Nevada, a personal

income tax is considered anathema

not to mention that it would take five

years to change the Nevada constitution to

allow it. And a corporate income tax rate

would have to be set too high to raise comparable

revenue, said Davis.

Washington’s B&O tax rate is currently

1.5 percent for services businesses and 0.5

percent for wholesale, retail and manufacturing

businesses. A corporate income tax

rate, estimates Davis, would have to be

between 14 percent and 16 percent to generate

the same amount of revenue.

Another argument has been that a gross

receipts tax would deter companies from

locating here and drive some existing businesses

into bankruptcy.

“We need to diversify the economy and

attract new business,” said Robert Jones,

president of the Northern Nevada Builders

Association in Reno. “That’s my biggest

concern about a gross receipts tax.”

Some have said that Washington’s B&O

tax has done just that – driven away the

likes of Boeing Co. and major manufacturers.

But that argument loses steam considering

that Washington’s B&O is 70 years old,

and was in place long before Boeing left or

Microsoft was founded. In 1993, the rate

was raised, said Davis, but was reduced

within four years to its current rate after

the business community protested.

To spare small businesses, the Nevada

tax policy task force is recommending that

any gross receipts tax have a minimum revenue

threshold of $350,000, meaning that

the first $350,000 in revenue for any business

will be exempt. That eliminates about

60 percent of the state’s businesses from

paying any gross receipts tax at all, estimates

the task force’s technical working

group.

Another fear is that companies would

end up paying for revenues they simply

passed along to someone else like a travel

agent who collects fares for airlines or a

builder who collects a bill for a subcontractor.

The task force, though, says it will provide

provisions to avoid double taxing such

so-called pass-through revenues.

Some Nevada businesses have already

accepted the possibility of a gross receipts

tax as the lesser of all evils. The Nevada

Resorts Association, which represents the

casinos, has endorsed it. An executive from

cable giant Cox Communications testified

before the task force that his company

would support it. An oil company owner

grudgingly accepted it once the task force

assured him that he would be able to pass

along the cost of the tax as a line item on

an invoice.

“Nobody in business likes more taxes,”

said Chuck Byrne, CEO of Hytek

Microsystems in Carson City. “But I could

live with a gross receipts tax as long as it

was implemented properly, meaning as

long as the rate doesn’t keep going up and

grow into some kind of monster.”

“Personally,” he said, “I think we have

to do something in Nevada.”

The task force recommendations

* A tax on business’ gross receipts at .25 percent, with a $350,000

exemption and a $100 per employee credit for business license tax

* A 50 percent increase in corporate filing fees; inflation adjustment for

the BLT; and application of the BLT to all businesses, including sole proprietorships

* A transaction tax on spectator entertainment such as movies

* An increase in cigarette and liquor taxes

* An increase in the cap on property taxes

For a copy of the report go to: http://www.appliedanalysis.com/Inetpub/wwwroot/

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