The Margin Tax Proposal: Initiative will Kill Business in Nevada

Unlike a corporate income tax, the margin tax would be assessed on a company’s revenues, regardless of whether it was making any profit.As a Nevada business owner or executive, you’re probably hoping that 2014 will be the year our state finally climbs out of the depths of the recession, but the so-called “Education Initiative,” which will come before the voters on the November 2014 ballot, could spell the end of any hopes for economic recovery. It has the potential to kill business in our state.

Here’s a brief outline of the proposal, which is more commonly (and more accurately) known as the Margin Tax Initiative:

In 2012, the Nevada AFL-CIO and the Nevada State Education Association (the teachers’ union) filed an initiative petition to institute a 2 percent tax on the gross receipts of most Nevada businesses. They got the necessary number of signatures by claiming that funds raised from this tax would be used to support education.

Unlike a corporate income tax, which taxes profits, the margin tax would be assessed on a company’s revenues, regardless of whether it was making any profit. The tax would be assessed on all companies with more than $1 million in revenue, and would take two percent of that revenue after a few allowable deductions. The easiest option would be to deduct 30 percent of your gross revenue, so you would be taxed 2 percent on 70 percent of your sales.

For example, if your annual sales total $1 million, you would pay 2 percent of 70 percent of your revenue, or $14,000, regardless of what your profit margin is, or even if you’re not making a profit at all. If you operate on a 10 percent profit margin, your net profit would be $100,000. So you would be paying $14,000 out of your $100,000 profit, an effective tax rate of 14 percent. This is much higher than California’s corporate income tax rate of about 8.8 percent. If you’re operating on a smaller profit margin, your effective tax rate would be even higher. The easiest way to figure out what your tax liability would be is to take your sales figure for the last 12 months (remember: sales, not profit) and multiply it by 1.4 percent. This is what you’d be paying to support the teachers union and their cronies, because there’s no provision in the initiative earmarking any of these funds for classroom instruction.

The only other state with a margin tax is Texas, where small businesses complain of disproportionate costs because they don’t have a staff of CPAs to handle all the paperwork required. Those who want to use the “cost of goods sold” calculation instead of deducting 30 percent of sales would be especially hard hit, according to the Nevada Taxpayers Association (NTA), because the margin tax calculates it differently than the IRS, so a business would have to keep two sets of records. The initiative also requires the Department of Taxation to post on its website the name of each taxpaying business and the amount of any tax paid, which has never been done before. Would you want your competitors to know what your gross receipts are?

According to the Tax Foundation, which publishes an annual list of business-friendly states, “Gross receipts taxes are distortive and destructive. Nevada should be careful about its options, as its ability to attract investment and capital depends greatly on its favorable tax climate.” Adding the margin tax would substantially drop our business-friendly ranking and sabotage the state’s efforts to diversify our economy. According to State Senator Michael Roberson, “The margins tax is a misguided, job-destroying tax. It will thwart economic development, drive existing businesses out of Nevada and put thousands of Nevadans out of work.”

If you care about the financial health of Nevada businesses, and of the overall Nevada economy, you need to educate yourself NOW about this dangerous proposal so you can spread the word about it and start working to defeat it.

By Whose Authority?

For more information on my Commentary and to see some of the backup research, or if you wonder why I take the position I take, go to www.LyleBrennan.com.

  • Yes on TEI

    Page 1 of the tax: “requires that the proceeds of the tax be used to fund the operation of public schools in this State for kindergarten through grade 12.” The education initiative holds everyone accountable for good schools in Nevada.

  • ShoudHaveBeenaFireFighter

    I am all for improving
    the education of our children in Nevada. We are dead last in the
    nation. However, it’s not because of a lack of money, it’s how the money
    is spent and how the school’s are run. The teacher’s union is the main
    reason there’s not enough money. Take the time to look at what
    public school teacher’s salaries are these days (www.transparentnevada.com)…and
    don’t forget that they only work 9 months of the year! Therefore, multiply it
    by 1.25 to get the real number. In addition look at their pension plans! In 2012 the base salary of Clark County
    teachers ranged from $66,000-78,000 and when you include “other pay” and
    benefits it ranges from $92,000-117,000. Yet the teachers are always
    complaining about what they make…

    I struggle and sacrifice
    every month to pay for my kids to go to private school which totals $7,500 a
    year per child and I don’t get any kind of credit for fact that we pay for
    public education and our children don’t attend.
    Do you think I want to have to pay this in addition to my current taxes for
    my children to get a good education? Guess what? In Nevada, we
    spend $8,454 per student each year. How is it that we can spend almost a
    $1,000 more per child, per year on a public education and get such an inferior education
    compared to private school? The answer
    is bureaucracy and unions!

    A margins tax is
    absolute absurdity! Even a business that
    loses money has to pay this ridiculous tax!
    I’m a small business owner involved in real estate and it’s quite easy
    to reach $1,000,000 in gross receipts when your product is real estate. I’d be lucky to actually make $100,000 for
    every $1,000,000 in sales. And if I did,
    I would have to pay $14,000 to Nevada (14%) and another $25,000 to the IRS
    (25%). That’s 39% of my income! Not to mention the fact that I don’t make
    money every year, even if I have gross receipts over $1,000,000. At least with an income tax you only have to
    pay when you actually turn a profit.
    Wouldn’t being forced to pay a tax on revenue when there is no income be
    considered communism?

    A margins tax will
    simply drive small businesses out of business, out of Nevada or both. Does anyone in the government ever consider
    the effect of their actions on small businesses? It seems to me they only thing
    they care about is helping big businesses and pretending to help the poor…oh
    and increasing the salaries and benefits of government employees of course!

  • Texan72

    Texas is already looking at abolishing its franchise tax. At the beginning of March (2014) 9 out 10 Texans voted to abolish the Texas franchise tax/ margin tax. Now it’s up to Texas law makers to give the voters what they want