Overlooked problem with the margin tax

Geoffrey Lawrence

By now, most business owners have heard that the state teacher union has qualified a new tax proposal for the November ballot. The proposed business “margin tax” is a modified version of a gross receipts tax.  In other words, businesses would face a new tax liability even if they aren’t profitable.

But most are not aware that key language in the tax might force firms to file taxes jointly with firms with which they have never done business.  A business owner may not even know the business owners with whom the tax would force them to file jointly, should the tax become law.

While the proposed margin tax is loosely based on a Texas tax, the proposal’s authors deviated from some key legal definitions in the Texas statute when they drafted their proposal for Nevada.  Of particular interest is the way they changed the definition of “affiliated group.”

When business owners structure their operations under multiple legal entities, it is common practice to treat these related entities as a single firm for tax purposes.  In Texas, for instance, business owners are required to file a joint margin tax return for all firms in which they hold at least 80 percent of the ownership stake and which are in related industries.  So, if the same individual owns an automotive repair shop, an auto parts distributorship and a gas station, these different firms would be considered an “affiliated group” and the owner would need to consolidate the three firms’ finances to complete a joint margin-tax filing.

The authors of the Nevada proposal, however, broadened the ownership standard for firms to be considered an “affiliated group.”  Instead of the 80 percent threshold, they consider firms to be an affiliated group if they are “controlled by one or more common owners.”  In fact, even minority ownership can be enough to meet this reduced standard.

The proposal specifies that:

“Controlled by” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a business entity, whether through the ownership of voting securities, by contract or otherwise.  (Emphasis added.)

An individual possessing only indirect power to cause the direction of business policies through the ownership of voting securities would include the owner of single share of stock who attends stockholder meetings to address board members with the intent of influencing company policies. 

Consider that scenario carefully.

Say, for instance, someone purchases a single share of stock each in Caesar’s Entertainment, MGM Resorts, Las Vegas Sands and Wynn Resorts and attends stockholder meetings regularly to address board members.  Under the expanded definitions of the proposed margin tax, this would be enough to force every major company on the Las Vegas Strip to consolidate financial information and submit a single margin-tax filing.

Worse, each firm would be held “jointly and severally liable for the taxes of the combined group.”  In other words, if MGM welches on its tax bill, the company’s competitors could be forced to pay its margin-tax liability.

The same could happen to smaller firms that are organized as general partnerships.  Let’s say there are several partners in a real estate brokerage and one of the partners also moonlights as a minority owner in a development firm that builds strip malls.  The margin tax could force the brokerage firm to consolidate its finances with the development firm even though most of the partners in the brokerage firm have nothing to do with the development firm.

In fact, the “affiliated group” could easily spiral to include third- and fourth-tier firms if the partner’s partners in the development firm also hold an ownership stake in other outside businesses.

Before long, a business partner may be forced to file taxes with people they’ve never met — much less done business with.  And, in the event just one of those people skips out on their bill, their affiliated “partners” may be left holding the tab.

This is exactly the type of drafting oversight that is normally vetted out during a legislative hearing, but voters get no chance to do so when taxes are proposed at the ballot box.

If you thought the tax itself was scary, the implications of this drafting oversight are downright terrifying.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org. This article first appeared in Nevada Business.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.