Taxes & Government Spending

Margins tax mayhem

Geoffrey Lawrence

In a long-anticipated move, the hard-left union bosses of the Nevada AFL-CIO and the state teachers union marked D-Day this year by launching another assault against Silver State businesses.

A ballot initiative filed by the unions would ask lawmakers to hammer businesses with a new margins tax and then earmark the money to directly benefit the unions.

The margins tax — basically a modified gross receipts tax — would be assessed on all companies with more than $1 million in revenue and would take two percent of that revenue after a complex array of deductions.

A serious danger the tax poses to business owners, the workers they employ and the families those jobs support is that it will kill some businesses that are already struggling.

That's because the tax is based on revenues, not profits. Businesses not making a profit in today's shrinking economy, or even firms currently operating at a financial loss, would likely face sizable new tax liabilities under the unions' proposal.

This scheme would accelerate firm closures and put even more Nevadans out of work.

The margins tax the unions desire would allow firms to deduct from their taxable base one of three options: (1) 30 percent of total revenue; (2) compensation to employees; or (3) cost of goods sold. The first two options are relatively straightforward. The third — "cost of goods sold" — includes a very complex legal definition based, in part, on filings with the federal Internal Revenue Service.

To declare an exemption under this option, firms will be required to separately account for the expenses of raw materials, investment in factories or heavy machinery, depreciation, handling, storage, licensing, franchising, insurance, spoilage, deterioration, and several other categories.

For firms whose production network operates across state lines, the accounting would be even more burdensome. That's because these firms will have to apportion these expenses to the State of Nevada based on the percentage of sales or production that takes place within the state's boundaries. In Texas — the only state that operates a margins tax — tremendous confusion surrounds the definition of "cost of goods" sold, Small businesses, which do not have the in-house accounting expertise necessary to navigate the tax, complain that they face disproportionate compliance costs due to the tax's complexity. Nevada's small manufacturers and mom-and-pop retailers — the businesses most likely to seek a "cost of goods sold" deduction — will be making these same complaints if union bosses get their way.

Even more troubling is that the Nevada tax department — which would grow into a state version of the IRS — would be required to post these highly detailed tax filings publicly on its website, according to language in the unions' initiative. This invasion of privacy is especially alarming for sole proprietors and other non-publicly traded companies.

Union apologists say that small or struggling businesses needn't worry about the union scheme, because the tax would only be assessed against firms with annual gross revenues over $1 million.

Apparently these advocates of tax hikes don't understand the difference between revenue and profit. Indeed, one of them defended the two-percent margins tax proposal by comparing it to California's eight-percent corporate income tax rate — clear evidence that the unions' apologists don't grasp how the tax would work. Thousands of mom-and-pop restaurants, retailers, gas stations and others top $1 million in annual revenues but realize only modest profits — or none at all. Likewise, many large corporations that in recent years have operated in the red easily exceed revenue of $1 million.

The true impact of the $1 million-and-under exemption will be to impose an extremely high marginal tax rate on very small businesses that begin to approach that threshold.

A firm moving from $995,000 in revenue to $1,000,000, for example, could face as much as a $14,000 tax liability for selling an additional $5,000 worth of its product. Indeed, firms approaching this threshold toward the end of the tax year may be forced to suspend operations until the new tax year begins.

These are just a few of the problems with this latest union attack on private industry.

Any way you slice it, the margins tax would be a disaster for the Silver State.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more information visit http://npri.org. This article first appeared in the July 2012 edition of 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.