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October 25, 2014

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Subsidiaries’ benefit to Nevada? Depends on where you fall on taxes

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The offices of Braeburn Capital, an Apple subsidiary that manages and invests Apple's cash, in Reno. Nevada has a corporate tax rate of zero, as opposed to 8.84 percent levied in California, where Apple has its headquarters.

The fact that Nevada is one of a handful of states without a corporate income tax is trumpeted by conservative lawmakers and activists as a key selling point in attracting businesses to Nevada — and reason to keep such a tax off our books.

But who’s coming here and what does the state get out of them?

Nevada is a tax haven for corporations — a U.S. version of the Cayman Islands but with fewer beaches, a place corporations can park subsidiaries with few employees and little economic activity to get out of a higher tax bill elsewhere.

The New York Times reported last week that Apple is using a subsidiary, Braeburn Capital, established in Nevada to avoid paying millions in California corporate income tax.

What does Nevada get?

State coffers collect a $200 annual business license fee and about $1,100 in payroll taxes for every $100,000 of salary paid to the fewer than 10 employees at the Braeburn office.

Apple is not alone. Nevada has 300,000 active corporations and LLCs, including subsidiaries of Microsoft, Charles Schwab and Harley-Davidson, according to academics.

But the Apple case highlights the fundamental tension that has shaped the public policy debate in Nevada over what we want to be.

On one side, pro-taxers say the state relies too heavily on gaming and sales tax from tourists, with large companies “not paying their fair share.” This leads to underfunded K-12 and higher education systems, which produce an inadequate workforce and keeps Nevada dependent on tourists.

But the consistent rallying cry from those opposed to more government spending is that higher taxes, and particularly a corporate tax, would scare away business, leading to further unemployment.

Apple’s case, reported last weekend, has become a focal point for those who want to change the direction of the state. They argue the tax environment does nothing to attract the kind of businesses that will develop a thriving economy.

“Having no corporate tax is not encouraging businesses to locate here and bring employees with them,” former state Sen. Sheila Leslie said. “We’re being taken advantage of. Apple is a prime example of this.”

Robert Lang, professor of urban affairs at UNLV, said Apple is “a sad metaphor for the state.”

“It’s not the image we want to project,” he said. “ ‘Come here and set up a shell corporation.’ ”

Why, he wonders, would a company move employees and jobs to Nevada when it can reap the tax benefits by setting up a subsidiary?

Or, as Lang put it: “Why buy the cow if the milk’s for free?”

Lang said the intangible asset companies are fine but not something to bank the state’s future on.

“It’s a side benefit,” he said. “As long as our taxes on corporations are low, what the hell, let’s sell a vicarious association with Nevada. It’s not something that should prevent you from raising corporate taxes if you choose to raise taxes.”

But the conservative side said Nevada should not be ashamed of Apple.

“I would hope we’d encourage more of these companies to come here,” said Tray Abney, director of government relations at the Reno/Sparks Chamber of Commerce. “These are high-paying jobs. I don’t understand the thought this is bad for Nevada, bad for Reno. It might be bad for California, but not us.”

Some of the arguments can appear self-serving: Monte Miller, a Las Vegas businessman who has been close to the state’s current and past governor and Republican lawmakers, has been a particularly influential voice in this conversation and advocate for the intangible asset business. Part of his wealth comes from incorporating and managing subsidiaries for companies for things like patents and intellectual property.

Indeed, if Nevada created a corporate income tax, there would be little reason for these types of businesses to have a presence in the state.

But the argument is that added together, these subsidiaries represent real jobs in Nevada.

Brian Bonnenfant, project manager for the Center for Regional Studies at UNR, estimates there are 44,000 jobs in the intangible asset industry in Nevada, including companies such as Microsoft Licensing and subsidiaries of companies such as Harley-Davidson and Charles Schwab. The jobs pay an average of $88,000 a year.

Take Microsoft, for example. The licensing division began as a subsidiary similar to Braeburn and now has developed into a company employing more than 200 people and becoming an active part of the business community in Northern Nevada.

In economic development, “Nevada really needs to understand there’s not really home runs out there with these industries,” Bonnenfant said.

Gaming and construction might have provided that. But now, Nevada, has to play small ball.

“In the near term or long-term future, what Nevada has to build themselves on are singles and doubles,” he said.

But if Nevada’s low tax is the key to salvation, why does the state suffer so many economic woes?

John H.O. La Gatta, a Reno investment banker who has formed a nonprofit to promote the intangible asset industry, notes that the high unemployment is tied to a busted construction industry that was based on the casino and home-building bubble.

The state, he said, has focused too much economic development activity on light warehousing and distribution — businesses that may employ more people but often pay much lower wages.

Apple might be “a small presence of a big company, but it’s a gift to Nevada. Repeat that time after time, in aggregate, it could be huge,” La Gotta said.

Moreover, subsidiaries like Braeburn are not a huge drain on government services.

Matthew Taylor, president of the Nevada Registered Agent Association, said the state gets tens of millions a year from its $200 business filing fee. These companies, with few employees, “don’t call the fire department, they don’t drive on roads,” he said.

Of course, that argument echoes those who tried to find the bright side when the Great Recession emptied the tourists from the Strip — there might have been fewer tourists, but there sure was plenty of parking.

CORRECTION: This story has been edited to correct the spelling of John H. O. La Gatta. | (May 7, 2012)

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