Taxes & Government Spending

The margins tax and you

Geoffrey Lawrence

Has the business where you work struggled in the past few years? Have you seen your coworkers laid off? Are you worried that you might be next?

That's a scary possibility. Unfortunately, it's one that could be much more likely for thousands of Nevadans if the state teachers union and AFL-CIO get their way.

Earlier this month, those unions announced an initiative petition to enact a new business margins tax. The margins tax — modeled after a controversial tax instrument in Texas — is a modified version of a gross receipts tax that would be levied against all businesses operating in Nevada.

One troubling aspect is that the unions' proposal would impose hefty new tax liabilities on firms already operating in the red. So if you work for a business that has been struggling, you may find yourself out of a job, since this new tax scheme would hasten the day that your company dismisses workers or declares bankruptcy.

Here's how the tax works: Businesses would be forced to pay 2 percent of their total annual revenues to the state each year. This amount is on top of the sales taxes, hotel taxes, live entertainment taxes and other taxes that your employer may already pay. The critical point, however, is that the tax is assessed against total revenue — not merely profits.

Thus, if a restaurant franchise did $1.6 million in sales last year, but faced space-rental, equipment, food, franchising, insurance, labor and other costs totaling $1.8 million — meaning the store lost $200,000 in these hard times — it would now face a new business tax liability that could force it to close.

The margins tax does allow business owners to deduct some expenditures against their total sales — which is what makes it a modified gross receipts tax. Businesses can choose from among three such deductions: (1) 30 percent of total revenue; (2) costs of labor compensation; or (3) cost of goods sold.

Of the three possible exemptions, "cost of goods sold" is the most complex — and highly ambiguous. Although intended to allow firms to deduct for expenditures on capital equipment — like factories or heavy machinery — the term is surrounded by legal uncertainties that have become a huge problem in Texas.

Because of the array of possible deductions and the volumes of financial documentation needed to support the deductions that accompany a margins-tax filing, accounting requirements under the margins tax are quite strenuous — and especially so for small-business owners.

In fact, one of the leading complaints about the margins tax in Texas concerns its unfairness to small businesses, given that they lack the in-house accounting expertise to navigate the tax and so must hire expensive outside specialists.

To administer the tax, Nevada's tax department would expand into a state version of the Internal Revenue Service — hiring an army of auditors to examine these complex tax filings. To pay for all those new auditors, the unions want the state payroll tax on financial institutions increased again.

If you're a small-business owner, of even greater concern is the unions' language requiring Nevada's tax department to publicly display on the World Wide Web your margins-tax filings. Competitors, political opponents and others will have immediate access to the intimate financial details of your business — including much of the information you submit confidentially to the IRS.

Union bosses have been traveling the state claiming that their tax won't impact small or struggling businesses, since it would only apply to firms with annual revenues over $1 million.

In making these claims, however, the bosses demonstrate either complete ignorance of the business world or their own dishonesty. Most small businesses — including local restaurants, independent gas stations and mom-and-pop retailers — exceed $1 million in annual revenue, even if they make zero profit. As the Nevada Taxpayers Association points out, "it is only the tiny business that will not be captured."

Given all these problems, it's no wonder Texas lawmakers in 2009 heard more than 100 bills to modify or repeal its margins tax.

What ain't working in Texas certainly won't work for Nevada.

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

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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.