How margins tax hurts business

By Thomas Mitchell

Thomas Mitchell

Thomas Mitchell

Though the November 2014 mid-term election is still a year away, business leaders are starting a drumbeat of opposition to a tax initiative on the ballot.

Voters will be asked whether to impose a 2 percent margins tax on Nevada businesses that have gross revenues in excess of $1 million, a proposal put forward by the Nevada State Education Association as a means of funding K-12 education.

“It will have a huge impact on our members that have revenue of a million dollars, which in a small business is not that large,” warns Bryan Wachter, director of public and government affairs for the Nevada Retailers Association. “They allow you to have a deduction for cost of goods sold, you can deduct compensation, or you can take a standard 30 percent deduction. They let you take that and then you apply the tax to that number. The problem with that is it completely ignores how a small business operates.”

Wachter said there is no deduction of anything else that goes to the bottom line of a business, such as rent and utility costs. Though a business incurs both compensation and cost of goods sold, it must choose one or the other to deduct and not both.
He said a small business that sells $1 million in goods might have a profit of only $60,000 a year.

“When you have a tax that could potentially come in at $15,000 or $30,000, you’re putting a lot of businesses in a position where they have to choose to stay in business or not stay in business,” Wachter said.

Also, the language in the margins tax does not match federal definitions. A company would have to maintain two sets of books, one for federal definitions and one following Nevada definitions. “So you’ve just doubled the amount of time you have to spend just trying to comply with state taxes,” he said.

The retailers are a part of the Committee to Protect Nevada Jobs, which also includes gaming, trucking, agriculture, banks, car dealers, restaurants, manufacturers and more.

“For retail our margins are so small to begin with that a 2 or 3 percent margin is considered outstanding, and when you tack on a tax that’s 2 percent there goes your margin,” Wachter said, and that means stores will have to make the choice of whether to remain open.

Kelly Bullis, who owns a certified public accounting firm in Carson City, says the initiative is already costing Nevada jobs just by being on the ballot and making businesses that might move here shy away.

“I talk to people who have businesses in California who are very disgusted with California. They’re going, ‘I’m moving. I’m leaving California.’ But they’re waiting to see if in 2014 the voters pass this margins tax,” Bullis said. “And they have told me if that gross margins tax passes, ‘I’m not going to move my business to Nevada, I’m going to move it to Wyoming, because Wyoming is on the I-80 corridor, and no income tax.’”

According to the Department of Employment, Training and Rehabilitation there are 57,600 employers in Nevada. Prior to the recession there were 60,500.

“I think the cost of compliance on this thing is going to be astronomical and once we put that infrastructure in place, it will never go away,” said Ray Bacon, executive director of the Nevada Manufacturers Association, who estimates it will take 120 additional employees in the Department of Taxation or 50 percent growth in the size of the department.

“Let me just say, it’s really, really stupid,” Bacon concluded.

Carole Vilardo, president of the Nevada Taxpayers Association, said businesses will treat the tax as just another expense of doing business.

“When I go to my accountant and calculate all my expenses, he comes back and says to me, ‘Your margin is not enough.’ I have a couple of things I can do. I can raise my prices, if the competition will let me, which means you, John Q. Public, is going to pay my taxes that I have to pay. Or I can freeze salaries. I can reduce hours of employees. I can not hire for vacancies that I had. In the worst-case scenario I may have to let go an employee or two. …
“Ultimately you have an impact on jobs,” Vilardo stated. “You have an impact on how fast we will recover.”

Thomas Mitchell is a longtime Nevada newspaper columnist. You may email him at thomasmnv@yahoo.com. Read additional musings on his blog at http://4thst8.wordpress.com/.

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