The only way to keep your health is to eat what you don’t want, drink what you don’t like, and do what you’d rather not.
– Mark Twain
The Commerce Tax was signed by Gov. Sandoval on June 9, 2015 and since that date, various groups have toiled to repeal it. Nearly three years later, as we close in on the 2018 election cycle, the Commerce Tax remains a hot-button issue for many candidates, particularly within the GOP. Indeed, the Commerce Tax will likely again be a deciding factor in a number of primary races (and may have brought about the primary challenge in the first place). Given recent reports of candidates weighing the possibility of repealing the Commerce Tax and the filing of a referendum which, if successful, would bring the question of repealing the Commerce Tax to the voters, it is time to re-familiarize ourselves with the history of the Commerce Tax, and begin thinking about positioning NAIOP for the upcoming policy discussion.
Nevada public schools have consistently ranked last in the nation for several years. Addressing the state’s education epidemic, Governor Brian Sandoval championed legislation intending to reform various aspects of the education system in the 2011 and 2013 Legislative Sessions. Following passage of these reforms and subsequent resounding defeat of the “Margins Tax” ballot initiative in 2014, Governor Sandoval aimed to source new revenue for education in the 2015 Legislative Session. Beginning soon after the 2015 Session convened, Senate Majority Leader Michael Roberson, Chairman of the Senate Committee on Revenue and Economic Development, led the legislative charge and held several weeks of hearings for the purpose of vetting each and every tax in effect for both policy and revenue efficacy, examining taxes and revenue sources not currently used in Nevada and ultimately assembling legislation which, together with legislation proposed by freshman Assemblyman Derek Armstrong and Assembly Majority Leader Paul Anderson, would become the most significant revenue-generating legislation in Nevada since 2003: Senate Bill 483. However, as is always the case with legislation, the path to SB 483 was far from straight.
At the beginning of the 2015 Session, Governor Sandoval proposed legislation seeking to increase state business license fees to an amount based on the gross revenue of the business. Sponsored by Leader Roberson’s Committee on Revenue and Economic Development, the bill – SB 252 – was immediately met with praise from “establishment” GOP members, vitriol from the far right, and silence from Democrats. The fee plan was cast as “too high,” and too similar to the “Margins Tax” ballot initiative defeated by voters just months before. As it became clear SB 252 would not have the votes to pass out of the Assembly, legislators proposed alternative bills. The bill which became the front-running alternative to the Governor’s bill was Assembly Bill 464.
Proposed jointly by Armstrong and Anderson, AB 464 sought to increase Nevada’s “modified business tax,” which is based on payroll of a business. Ironically, the tax increases set forth in AB 464 were projected to result in revenues in excess of the Governor’s plan in SB 252. Ultimately, a consensus grew regarding effecting a tax policy which did not target any single tax for an increase (which would affect some businesses, but not others), but rather, assembled a combination of increases, which would lessen the impact on small categories of taxpayers.
As the 2015 Session drew to a close and the viability of AB 464 became doubtful, an amendment to SB 483 was proposed as compromise legislation. Although SB 483, sponsored by the Senate Committee on Revenue and Economic Development was initially drafted as an augmentation to the modified business tax, the amendment completely overhauled the bill. When the dust settled, another education funding bill with four main components emerged. SB 483 contained parts of the Governor’s business license fee increase, parts of the increase to Nevada’s modified business tax, an increase to the cigarette tax and a new “Commerce Tax.”
The Commerce Tax is an assessment on gross receipts earned in Nevada in excess of $4 million, at varying percentages based upon the business’ NAICS code (which identifies the type of business). Gross revenue is defined in SB 483 as “. . . the total amount realized by a business entity from engaging in a business in this State, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income . . .,” subject to certain deductions specifically enumerated in Section 21 of SB 483.
The Department of Taxation reported the Commerce Tax generated more than $143.5 million in its first fiscal year, out-performing initial projections by more than 17%.
As stated above, some candidates are advocating repeal of the Commerce Tax. Amendment and even repeal of any law via legislative means is understood and needs no clarification here. In addition, a referendum has been filed to bring the question to the ballot. To certify a referendum for the ballot, proponents of the referendum must collect valid signatures of 10% of those who voted in the general election immediately preceding the referendum. With respect to the Commerce Tax, proponents need to collect approximately 112,500 valid signatures by June 19, 2018 to qualify the question for placement on the November 6, 2018 ballot.
The referendum effort carries with it tremendous risk. Should the referendum vote succeed, obviously, the Commerce Tax will be repealed, requiring the executive and judicial branches to bridge a substantial budget gap through alternative means (spending cuts and/or creation of revenue streams). To date, proponents of the referendum have not identified specific reductions in spending and simply stated, no one wants to raise taxes in any respect. On the other hand, if the referendum to repeal the Commerce Tax is unsuccessful at the ballot, the Commerce Tax is deemed “affirmed,” and “…shall stand as the law of the state and shall not be amended, annulled, repealed, set aside, suspended or in any way made inoperative except by the direct vote of the people.” Nevada Constitution, Article XIX, Section 1. As such, an affirmation makes the Commerce Tax incredibly unwieldy and over time, unresponsive to the needs of the state.
Specific to NAIOP, the effect repealing the Commerce Tax will have on NAIOP members is likely as diverse as the membership itself; some may benefit, some may be adversely affected and still others won’t feel it at all. However, the adverse impact of an affirmation will be immediately felt by NAIOP and its members. As we have discussed, NAIOP intends to advocate in favor of legislation prohibiting assessment of the Commerce Tax on common area maintenance charges in commercial leases. As common area maintenance charges are passed through to the tenant and seek to recover landlord hard costs, the charges are not revenue in any respect, and certainly should not be taxed as such. Should the repeal referendum fail at the ballot and the Commerce Tax be affirmed, it will become constitutionally galvanized, and NAIOP will likely be unable to make this statutory clarification.
As far as tax policy goes, the dynamics of the Commerce Tax are about as complex as it gets. However, because the Commerce Tax has remained a central focus – particularly in GOP primary races – it is important to have an awareness of this issue and its history to more fully understand the political maneuvers which will take place over then next eight months. Yes, the primary elections are really that far away.
Odds & Ends
This month, news broke regarding the sale of naming rights for the new baseball stadium in Downtown Summerlin. Moving the 51’s organization to a new stadium brought to mind a story regarding the Chicago Cubs. In 1908, six years before the team moved to what came to be known as Wrigley Field, the Cubs played on the west side of Chicago in a ballpark aptly named West Side Park. The left field wall of the park abutted Cook County Hospital, specifically, the psych ward. During games, players and fans would hear the patients screaming, and would commonly say the noise “came out of left field.” Over time, the phrase came to be used to describe unforeseen statements or actions for obvious reasons. So, as the desert sun sets on Cashman Field, one can only wonder what folks will say 100 years from now of the stadium which once stood across the street from the Grant Sawyer Building, which houses Nevada state government offices.
Hope you had a Happy Halloween!
Jon & Kerrie
Jonathan P. Leleu, Shareholder
Kerrie Kramer, Assistant Director