Business tax debate separates Nevadans

Friday, Nov. 22, 2002 | 4:10 a.m.

WEEKEND EDITION: Nov. 24, 2002

Special interest groups are already lining up on different sides of the debate over whether the state should adopt a new gross receipts business tax proposed by the Governor's Task Force on Tax Policy in Nevada.

On one side is the gaming industry, Culinary Union Local 226 and the Nevada State Education Association, which support broad-based business taxes, arguing that everyone should pay their fair share.

On the other side are Las Vegas Chamber of Commerce and assorted business and industry associations that say the proposal would cut into their single-digit profit margins.

Of all the new and increased state taxes recommended by the task force, the proposed gross receipts tax would raise the most revenue, but also looms as the most controversial.

It would require all businesses in Nevada that sell more than $350,000 in goods and services annually to pay a one-quarter of 1 percent levy on their revenue from those sales. They would also be allowed to subtract from the tax a credit of $100 per employee. A company that grossed $1 million and had 10 employees would pay a $1,625 tax, minus $1,000 in employee credits for a total payment of $625 under the proposal.

This differs greatly from 46 states that charge a corporate income tax. That tax is on net profits and is generally in the 6 percent to 10 percent range. Only three other Western states -- Washington, New Mexico and Hawaii -- charge a gross receipts tax, with Washington coming closest to Nevada's proposed version.

Proponents of a Nevada gross receipts tax say the $350,000 exemption would eliminate at least half of the state's businesses, and therefore affect mostly large companies.

The controversy comes from the fact that some industries could wind up paying a higher percentage of their earnings than others, or could pay taxes on revenue while operating in the red.

Those complaints don't faze task force member Mike Sloan, however. Sloan, Mandalay Resort Group senior vice president, said that all businesses within a given industry would be taxed the same so that there would be no disadvantage. He also said he doubts the tax would force anyone out of business.

"It's difficult for me to perceive that any business would sink or swim on one-quarter of 1 percent," Sloan said. "All of these businesses exist in other states that have taxes on corporate income or gross receipts. In Washington, which has a gross receipts tax, new homes are being built and cars are being sold."

One gross receipts tax opponent is the Southern Nevada Home Builders Association, which argues that most of its members operate on profit margins of 3 percent to 5 percent. Mark Doppe, president of home builder Carina Corp. and past association president, said a gross receipts tax "is probably one of the worst ways to come up with new revenue."

"That's why we're opposed to it," Doppe said. "It's a regressive tax because it doesn't take into account whether you have the ability to pay this tax. Most home builders rely on a healthy business climate, and this would throw a wet towel on that."

In Washington, which has had a gross receipts tax since 1935, the tax rate is 1.5 percent for service industries, and slightly less than one-half of 1 percent for wholesalers, manufacturers and retailers. Mike Gowrylow, spokesman for the that state's Revenue Department, said the tax "is not very popular among businesses," but said he knew of no company that closed its doors because of it.

"It does penalize people on a small profit margin because it isn't profit based. But we have car dealers in this state that operate on small margins, and they manage to survive," Gowrylow said. "There hasn't been any recent attempt to repeal the tax because you'd have to replace the revenue."

New Mexico doctors, however, are threatening to leave that state unless they are exempted from its gross receipts tax, which was implemented in the 1960s. Businesses there have the option of incorporating the tax into their prices or charging it as a separate line item, similar to a sales tax. But doctors have complained that health maintenance organizations refuse to pay the tax when contracting with the physicians, forcing the doctors to absorb those costs.

"Get ready for the war because you will have businesses coming out of the woodwork to oppose the tax," said Glenn Ellington, secretary of the Taxation and Revenue Department.

Despite its business critics, Ellington and Gowrylow said that gross receipt taxes in their respective states are among the most stable of their revenues.

"In our state 30 percent of the taxes come from services, so in that sense it is a modern tax," Ellington said. "As our economy expands into a service economy, it captures taxes that other states don't capture."

The proposed Nevada tax would also affect the service sector, such as doctors and lawyers. But because of the massive amount of additional computer hardware and software needed by the state to administer the tax, the task force recommended it not be implemented until July 2004 if adopted.

However, Gov. Kenny Guinn on Tuesday said the latest figures show that the state budget deficit would be $450 million to $500 million next year, far more than the projected $327 million that the task force used. There is a possibility that this could lead Guinn to ask the Legislature to enact a gross receipts tax that would take effect as early as July 1.

The recommendations, which included increased property and "sin" taxes as well as a new 6.5 percent entertainment tax, would raise only $335 million next fiscal year.

The task force estimated that a gross receipts tax would raise $227 million in the fiscal year running July 2004 through June 2005. The money would be used to help rescue a general fund budget that the task force projected would have a $379 million deficit in July 2004 if current programs are maintained without increasing taxes.

Guinn said more money is needed next year for education for an additional 20,000 school children, and to provide for a 2 percent teacher salary increase. Health care and utility costs also are expected to increase.

Keith Schwer, UNLV's Center for Business and Economic Research director, said the decision of whether businesses absorb the gross receipts tax or pass the cost on to customers will depend on "a whole slew of factors." But he said the tax has inherent weaknesses such as two businesses with different profit margins could pay the same amount of tax.

"It's a tax that most states don't use because it's a tax on top of a tax," Schwer said. "If you had a farmer who grew wheat, he would be taxed on the sale of that wheat. It then goes to the miller, who would be taxed after making it into flour. Then it goes to the baker, who would be taxed and then to the grocery store, which would also be taxed. It's a tax on each stage of production."

Task force member Kenneth Lange, Nevada State Education Association executive director, said the tax's advantages include the relatively large amount of money that can be raised on a small-percentage tax and that it can be easily calculated.

"It's a relatively small piece of the pie when you talk about one-quarter of 1 percent," Lange said.

"Our association supports the recommendations of the task force because we're focused on the fact that we're 45th in the nation in per-pupil funding. School employees haven't had a meaningful pay increase in six years, and our classes are tremendously overcrowded. We have 41 to 43 kids in middle school classes."

Still, the idea of a gross receipts tax is expected to face stiff political resistance, particularly in the Republican-controlled Nevada Senate, because of the opposition from various industries.

"Instead, why don't we clean up some of the taxes we already have, like the real property transfer tax?" Doppe said. "The mechanism and bureaucracy are in place to collect that tax, and it wouldn't scare any new businesses from coming here."

Proponents of a broad-based business tax are not sitting idly by.

The Culinary Union, whose members include casino food servers, bartenders and cocktail waitresses, jumped into the battle earlier this month when it announced it would air television advertisements on cable stations touting a broad-based business tax to pay for education.

The first ad focuses on Bank of America with the argument that the banking industry needs to do more to support education in Nevada. But the union is involved in a dispute with a division of Cox Communications over the ad's contents and was unable to get it on the air as of earlier this week.

"The view missing in the tax debate is that of working families," Culinary Union Political Director Glen Arnodo said. "We want to speak out about big corporations in this state that aren't doing their fair share. We want to build grass-roots support for a broad-based business tax.

"But it will be a difficult task getting a broad-based tax passed in this session of the Legislature."

The gaming industry, one of the state's major sources of taxation, has also been a big proponent of the gross receipts business tax. Gaming representatives such as Sloan argue that numerous large businesses, including banks, home builders and large retailers with headquarters elsewhere, have failed to pay their fair share of taxes in Nevada, even though they pay business taxes in other states.

"They all ought to look themselves in the face and agree to help Nevada because they make a lot of money here," Sloan said. "Don't think that those companies and their employees aren't getting state services. Yes, they are."

Opponents say the tax can place an unfair burden on particular industries. Nevada Beer Wholesalers Association President Bill Gialketsis said a gross receipts tax, coupled with a proposed 88 percent increase in beer taxes, could force beer price increases locally.

"If the governor says we've got to stabilize the revenue base, we want to be good corporate citizens and step up," Gialketsis said. "But we don't think we should get taxed on the beer end and on the business end both. We don't think we should pay twice."

Similar sentiment was expressed by Jack Stanko, owner of a Reno automotive dealership and secretary-treasurer of the Nevada Franchised Auto Dealers Association.

"The main problem is that when you're talking about a one-quarter (of 1) percent gross receipts tax on total sales, in a high-volume, low-margin industry that has some impact," he said.

Stanko said many dealerships operate on a profit margin of no more than 2 percent. And while that can still translate to millions of dollars in profit for high-volume businesses, the 107 members of his association estimated they would have to pay $12.5 million in new taxes in fiscal 2004 if the gross receipts tax is implemented, he said.

"If you're in an industry with a 1 percent profit margin, you'd end up spending 25 to 30 percent of your profits on this tax. A typical dealership in Nevada would probably stock fewer vehicles and sell them at a higher price. It would end up costing the consumers. But it's not easy to pass on costs to consumers because we're in a competitive business."

The National Association of Convenience Stores, based in Alexandria, Va., is also unhappy about the proposed gross receipts tax that would be applied to Nevada's 853 convenience stores. Spokesman Jeff Lenard estimated that the tax would reduce a typical convenience store's profits considerably.

Convenience stores that sell gasoline averaged $2.7 million in annual gross receipts nationally last year, but had pre-tax profits of only $28,000, a profit margin of slightly more than 1 percent, he said. The gross receipts tax for a store with that gross income would be $5,875, minus $100 per employee per year.

"That would definitely be a considerable hit, and you're talking about an industry that is already highly taxed when it comes to motor fuel, beer and cigarettes," he said.

Task force Chairman Guy Hobbs, managing partner of Las Vegas consulting firm Hobbs, Ong & Associates, said that because the gross receipts tax will be paid quarterly, businesses such as convenience stores can plan in advance to raise prices to absorb the tax costs.

"If you know what's coming in terms of the tax, you will be able to adjust the price of Pop Tarts or dog food in a way that will be most palatable for your clients or most profitable for you," Hobbs said.

Lange said complaints from businesses about the gross receipts tax might have merit if it meant they could lose customers to other states. But Lange said neighboring states have business taxes that would still give Nevada a competitive advantage.

"The argument that the gross receipts tax puts them at a competitive disadvantage doesn't wash," Lange said. "I'm having a hard time sorting out how many of these folks don't want to pay any taxes and how many of them are simply making a knee-jerk reaction."

One group taking a wait-and-see approach is the Nevada Restaurant Association. President and Chief Executive Van Heffner said an aspect of the gross receipts tax proposal that may be palatable to restaurants is the $100 per employee credit that could be deducted.

Heffner said many restaurants likely would eat the tax because if they raise prices, they run the risk of losing customers. The tax could be particularly hard on new restaurants, which have a national failure rate of at least 60 percent in the first year of operation, he said.

"We're very concerned because the operational margin is so limited, especially with new restaurants," Heffner said. "In the first year of operation you're normally losing money because you're investing in the restaurant. The tax could jeopardize a restaurant's ability to remain liquid and provide quality food and beverages for the consumer."

The task force recommended that lawmakers revisit the gross receipts tax if it can be proven that it has a detrimental effect on particular businesses. But Hobbs said he has yet to see that proof.

"We realized that should a gross receipts tax be implemented it needs to be fine-tuned so that there are no irregularities in its implementation," Hobbs said. "It is a very low tax rate compared to what you would find in other states.

"I find it hard to believe that any business would go out of business because of this tax. Nearly every business will find a way to pass it on in some form."

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