By: Erin R. Barnett, Esq., McDonald Carano Wilson LLP
Nevada’s newly-enacted Commerce Tax, ushered in by the passage of Senate Bill 483 on June 10, 2015, will assess varying rates of taxation on the gross revenue of Nevada businesses in excess of $4 million per year. The rate of taxation depends on the industry. Real estate leasing, for example, has a tax rate of 0.25%. The August 15, 2016 deadline to submit the first Commerce Tax returns is fast approaching, and there has been no shortage of questions with regard to the application of the tax.
In connection with the drafting of proposed Regulations for the Commerce Tax, NAIOP’s Government Affairs Committee has submitted input on behalf of our organization to, and has appeared before, the Nevada Tax Commission. In addition, our Committee has met separately with the Department of Taxation in an effort to gather more information on the application of the Commerce Tax in the context of commercial real estate. The Committee was particularly interested in understanding whether common area maintenance charges (“CAMS”) or other property operating costs collected by a landlord from a tenant, but paid to third-party service providers, must be included in calculating a landlord’s gross revenue subject to the Commerce Tax.
By way of background, Senate Bill 483 broadly defines taxable ”gross revenue” as ”…the total amount realized by a business entity from engaging in a business in this State…” The Bill provides limited deductions from gross revenue, including the deduction of certain ”pass-through revenue,” which includes the following: ”reimbursement for advances made by a business entity on behalf of a customer or client, other than with respect to services rendered…by the business entity in carrying out the business in which it engages.” It was the aim of the Committee to confirm whether or not CAMs/property operating costs paid by a tenant constitute ”reimbursements for advances” made by a landlord on behalf of that tenant, such that the payments may be categorized as pass-through revenue and deducted from gross revenue.
The Department initially indicated that all CAM charges/property operating costs collected by landlords from tenants should be included in gross revenue. However, upon consideration of the Committee’s written submissions, and following subsequent discussions between the Committee and the Department regarding the details of commercial leasing, the Department appears to concur with the Committee’s position that the language of the lease in question would be applicable and a key factor in determining the inclusion of such costs in gross revenue. Specifically, the Department advised the Committee that:
Determining whether a specific payment to a landlord is part of gross revenue, or is reimbursement of a cost advanced on behalf of a tenant, is a fact-specific analysis. The terms of the [lease] will determine whether a payment is, in fact, additional rent which the landlord collects to maintain the building operations to meet the terms of the lease, or if the landlord is receiving reimbursement for a cost advanced specifically on behalf of a tenant.
Thus, when landlords (or their tax advisors) complete their Commerce Tax returns this August, consideration should be given to whether the payment of CAM charges/property operating costs constitutes a reimbursement by the tenant for amounts advanced by the landlord on the tenant’s behalf, or whether the lease puts the obligation to pay for such services on the landlord. In a gross lease, for example, where property operating costs are included in the rent, and ultimately are the landlord’s responsibility, it is less likely that the portion of the rent intended to cover property operating costs will be considered a reimbursement by the tenant, and thus a pass-through expense for the purpose of the Commerce Tax. The opposite may be true for triple net leases, to the extent such leases describe the tenant’s obligation to pay CAM charges/property operating costs in order to reimburse the landlord for costs advanced on behalf of the tenant.
Thus, for landlord’s whose gross revenue is near $4 million per year, depending on whether or not CAM charges/property operating costs are included, special care should be taken by such landlords (and their legal counsel) when drafting leases going forward, with a view to minimizing the landlord’s potential tax liability. The impact on the tenant would not likely change, as the Tenant would pay such amounts in any case, under typical triple net leases. Also, the Nevada Tax Commission has not issued final Regulations governing the application of the Commerce Tax. As such, landlords should not rely on the preliminary communications between the NAIOP Board and the Commission until the final Regulations are available for further review. Finally, it is important to note that nothing in the above summary is intended to serve as tax or legal advice to any tax payer, or to create any attorney/client relationship between McDonald Carano Wilson LLP and any member of NAIOP Southern Nevada. All landlords are encouraged to discuss their potential tax liability under the Commerce Tax with their own tax and legal advisors.[/vc_column_text][/vc_column][/vc_row]