Nevada's Commerce Tax: Is Your Company Ready for its First Annual Filing?
As of June 30, 2016, entities conducting business in the state of Nevada will be obligated to file a Commerce Tax Return for the first time. Signed into law in June 2015 by Governor Sandoval, Nevada’s Commerce Tax became effective July 1, 2015, and is imposed on certain entities doing business in the state, whether or not they have a physical presence. Once considered a very tax-friendly state, Nevada implemented a commerce tax as part of an estimated $1.5 billion omnibus tax plan to help fund the state’s education system.
The Commerce Tax is imposed on entities engaged in business in Nevada, including partnerships, limited liability companies, C corporations, S corporations, trusts and individuals filing Schedule C (Profit or Loss from Business), Schedule E (Supplemental Income and Loss) or Schedule F (Profit or Loss from Farming). Certain real estate investment trusts (REITs) are excluded from the definition of a taxable business entity for purposes of this tax. Physical presence in Nevada is not required to be subject to this new tax.
The tax is based upon gross revenues apportioned to Nevada, less certain exclusions and deductions. No deduction is permitted for cost of goods sold or other expenses. However, no tax is imposed if the Nevada gross revenues do not exceed $4,000,000 in a taxable year. Businesses with Nevada gross revenues that do not exceed $4,000,000 will still be required to file a return to declare that the threshold is not exceeded. Separate entities within a parent-subsidiary group are not treated as a single taxpayer. Each business entity with nexus (situs) in Nevada is required to file its own Commerce Tax Return.
While many exclusions apply, revenues are deemed to be Nevada revenues defined as follows:
- Rents and royalties from real property located in Nevada.
- Revenue from the sale of real property located in Nevada.
- Rents and royalties from tangible personal property located or used in Nevada.
- Revenue from the sale of tangible personal property delivered or shipped to a buyer in Nevada.
- Revenue from the sale of transportation services if both the origin and destination of the transportation are located in Nevada.
- Revenue from the sale of any services not otherwise described, in proportion to the benefit the purchaser uses or receives within Nevada (if the location of the benefit cannot be determined, a reasonable alternative method of apportionment may be used).
- Revenue from sources not otherwise described are sourced to Nevada if the receipts are from business conducted within the state. For this purpose, the physical location of the customer is the determining factor.
The tax year for the Commerce Tax is a fiscal year running from July 1 to June 30 of the following year, regardless if the business operates under a calendar or fiscal tax year.
Effective July 1, 2015, the initial commerce tax year ends June 30, 2016, with the first annual filing of the Nevada Commerce Tax Return due 45 days after the tax year end, or August 15th, 2016.
Taxpayers may request a 30-day extension upon written application and must demonstrate good cause. An extension is not granted automatically.
The rate of tax varies depending on the industry or business category in which the taxpayer is primarily engaged. There are 26 different classifications defined by the North American Industry Classification System (NAICS) code, with rates ranging from .051% for mining, quarrying and oil & gas extraction to .281% for educational services. Entities with multiple lines of business are classified under the business classification which generates the highest percentage of Nevada gross revenue. For businesses not included in a listed classification, the tax rate is .128%.
In determining gross revenues, the business’ method for accounting for revenue used for federal income tax purposes is mandated to be used for the Commerce Tax. Revenue is sourced or sitused to Nevada according to specific rules depending on the type of revenue received. Service revenue is sourced to where the benefit is received. Tangible personal property is sourced to point of delivery, regardless of F.O.B. point. Revenue from sales, rents and royalties of real property are sourced based upon location of the property.
Entities conducting business in Nevada should prepare themselves to determine their Nevada source gross revenue for the fiscal year ending June 30, 2016 for purposes of determining their filing obligations.
Should you have any questions as to whether this tax is applicable to your business, please contact your Marcum tax professional.