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Nevada Commerce Tax - All You need to Know

With your company registered in Nevada, there are many things that you need to take care of. And one of the main things is complying with the laws and paying the applied taxes on time. Speaking of taxes, Nevada has always been a favorite for many entrepreneurs when it comes to starting a company here. And the simple reason for this is that the state has never imposed any gross receipts tax, Nevada commerce tax or business income tax.

Being a “tax-free state,” Nevada has always attracted a lot of businessmen to set up their companies here. As a matter of fact, any business that wants to incorporate outside from their “home” state usually choose Nevada as the state to incorporate in due to the lack of the state income taxes and the low filing fee. But recently in a 2015 Legislative Session, there was a new law created. This law is called the Nevada Commerce Tax law.

The Nevada Commerce Tax

It was before the 78th Nevada Legislative Session when the “The Revenue Session” was dubbed in reference to the bipartisan acknowledgment of the legislators that the legislation has to meet the growing budget demands of Nevada. Then in 2015, during the session, the new Commerce Tax was introduced. And the aim for the tax was to increase the revenue for the education system in the state.

The new Nevada Commerce Tax is a tax that is imposed on the rights of a person who is earning from a business that is registered Nevada. This tax is only applied to those businesses that have a gross income that exceeds $4 million in a taxable year.

Moreover, there is still no tax imposed on personal income. The government aims at imposing the tax on the strong business revenues and not on the wages. And with the new Business Taxes in Nevada (Senate Bill 483 (SB 483)), a company has a threshold of $4 million that can be deducted from the gross revenue when finding the Nevada Commerce Tax liability.

As a matter of fact, it is not the threshold for filing. This means that any company that is running a business in Nevada has to file the Commerce Tax Return. This is regardless of it the company’s tax liability unless the company is exempt from filing for the tax return.

So, if a company earns an amount that is less than $4 million as total income in a fiscal year (financial year), they can select the box on the form of the Nevada Commerce Tax Return indicating that the company has an income that is below the threshold. This form would then have to be submitted to the government. On the other hand, those that have an income that exceeds the threshold would have to calculate the liability of the Nevada Commerce Tax.

And it is normal for all the additional state taxes that come in to be burdensome for many businesses, but the Nevada Commerce Tax has many unique aspects as shared below:

  • Tax is imposed on a separate entity basis.
  • Taxpayer funding is used for potential state audit expenses.
  • A fiscal year filing requirement.
  • Virtually no deductions from gross receipts.

What entities are subjected to the Nevada Commerce Tax?

Those businesses that are engaged in business within Nevada are subjected to the Business Taxes in Nevada. A business entity means a:

  • A corporation (C- or S-corporation)
  • A joint venture (Note: This includes any joint venture, excluding the co-ownership arrangement or joint operating company, that meets the requirements of 26 C.F.R. §1.761-2(a)(3), Treasury Regulations §1.761-2(a)(3) and that elected out of the federal partnership treatment as offered by 26 U.S.C. §761(a).)
  • A partnership
  • A limited-liability partnership
  • A joint stock company
  • A proprietorship
  • A business trust
  • A bank
  • A holding company
  • A Limited-liability company
  • A business association
  • A professional association
  • A savings and loan association
  • A sole proprietorship
  • Independent contractors
  • The individuals with rental real estate or royalties
  • Or any other person that is engaged in business in Nevada, which also includes a natural person who files schedule E, part I, with their Federal tax return.

“Engaging in business” means that continuing, conducting, and commencing a business and the exercise of franchise or corporate powers concerning a business, without any limitations.

Let us take an example to understand this better:

Example: KLMNOP Inc. is corporation that is incorporated in Nevada and has the license to work in Nevada. Now, let us say that all the activities of the business are in California and there isn’t any income in Nevada for the company. In this case, the company would have to file the Commerce Tax Return in Nevada. Nevertheless, since it is not getting any income from Nevada, it would not have a tax due.

But remember that the filing is an important step that has to be done regardless of if the company is getting income from Nevada or not, and if the company has a Nevada license to do business. Moreover, the companies that are set up in other states but are engaged in business in Nevada are also obligated to file the Nevada Commerce Tax Return.

In short, the activities that are subjected to the imposition of the tax includes renting, leasing, or selling personal or real property in Nevada, offering services while being physically located in Nevada, holding and maintaining a business facility or place in Nevada, entering into a contract to work in Nevada, and having employees in Nevada. So, if any company is performing any of the above mentioned activities have to file for the business taxes in Nevada.

Which Entities are Exempt from the Nevada Commerce Tax?

Yes, there are some organizations that are not obligated to file for the Nevada Commerce Tax. And the entities that are exempt from filing for the new Nevada Commerce Tax include:

  • IRC 501(c), NRS 82 and NRS 84 non-profit organizations
  • Grantor trusts
  • Credit unions
  • Business entities organized pursuant to NRS 82 or NRS 84
  • Passive entities
  • Real Estate Mortgage Investment Conduits
  • Governmental entities
  • Certain Real Estate Investment Trusts
  • Individuals
  • Entities that only manage and own intangible investments, that includes patents, trademarks, stocks, bonds.

Entities that are exempt from the Commerce Tax must file an Exempt Status Entity Form with the Nevada Secretary of State. The exemption remains in place until the status of the business changes.

What is Taxed?

The Commerce Tax applies to gross revenues that are “sitused” in Nevada. Such gross revenues include:

  • revenue from rents, royalties, and sales of real property are sitused in Nevada if the real property is located in Nevada;
  • revenue from rents and royalties from personal property are sitused in Nevada if the personal property is located or used in Nevada;
  • revenue from the sale of personal property is sitused in Nevada if the property is delivered or shipped to a buyer in Nevada, regardless of the origin or other condition of sale; and
  • revenue from transportation services is sitused in Nevada if both the origin and destination points of the transportation are located in Nevada.

The legislation also contains a “catchall” provision for gross revenue not otherwise described, which is extremely broad and undetailed. The “catchall” was a subject of substantial discussion at the initial regulatory hearing before the Department of Taxation (Department) on July 7, 2015, and is likely to be clarified as the Department establishes its regulations on this tax.

Returns, Commerce Tax Year and Filing Deadline

The Commerce Tax year runs from July 1 through June 30. Returns are due 45 days following the end of the tax year. For 2016, the filing deadline was Aug. 15, 2016. A 30-day extension of time to file is available upon written request – currently there isn’t a separate form for the extension request.

Penalties and interest will be assessed if the Commerce Tax Return is not timely filed or the tax timely paid, based on the amount of unpaid tax. For this first tax year, there is a grace period until Feb. 15, 2017 to file and pay the tax. Penalties and late charges may be waived if the return is filed and the amount due is paid during the grace period if there is good cause for being late (i.e., the failure occurred despite the exercise of ordinary care and was not intentional or due to willful neglect). Waivers will be determined on a case-by-case basis.

Each separate entity must file its own Commerce Tax Return – there is no provision for consolidated returns. Simplified reporting is available for entities with less than $4,000,000 gross Nevada revenues for the year; and, returns can be filed online.

Fiscal year tax

The tax year is a fiscal year ending June 30. The report is due 45 days after the end of the fiscal year ending June 30, 2017. This means your commerce tax return and payment will be due August 14, 2017.

You may request a 30-day extension by written request with “good cause” before the due date. SB 483 does not provide a clear nexus standard applicability to the commerce tax and does not address the applicability of the physical presence nexus standard and Public Law 86-272.

Exclusions and deductions

There are exclusions and deductions from gross revenue. However, there is no deduction for cost of goods sold or other expenses incurred. The commerce tax rates vary depending on the industry type, based on your North American Industry Classification System (NAICS) code. The NAICS code reported on the initial return links your status with the state. If an appropriate NAICS category cannot be determined, the unclassified rate of 0.128% will be applied. The rates range from 0.051% to 0.331%.

The Welcome Letter

All Nevada entities should have received a “Welcome Letter” with information regarding the Commerce Tax filing requirements and enrollment instructions. Due to difficulties in implementing the tax, some entities may not have received the notice and other entities that have no Nevada revenues may not realize there is still a filing requirement. Additional information regarding the filing and registration requirements can be found on the State of Nevada Department of Taxation website.

This Taxpayer ID number is different from your Nevada Business ID number which is located on your Nevada State Business License. Your Taxpayer ID number is what you will use to file the Commerce Tax Return. If you did not receive a letter, please contact the Nevada Department of Taxation Taxpayer Call Center at 866-962-3707 to get the Tax ID number assigned to your business.

Steps to Take Before Filing for the Nevada Commerce Tax Return

Now that you know the basics of the Nevada Commerce Tax let us understand what to do next. So, before you can file, there’s a couple of steps that you’ll need to take:

STEP 1: You have to determine your NAICS code, that’s the acronym for the North American Industry Classification System from the 26 different categories selected by the state to choose from. To determine which NAICS code applies to your business you can look it up at the following link http://www.naics.com/search/ and then drill down from the initial category to determine which one best describes your primary business activity.

Please note: If your business operates multiple types of businesses under its single entity that don’t fall under the same NAICS code (like a bar and laundromat), the NAICS code would be the category where the highest percentage of revenue comes from.

STEP 2: You have to mail in or file online at http://tax.nv.gov/comtax/ the Commerce Tax Additional Information Form which is how you complete your registration. The state has to gather information such as your federal tax id number; the names and addresses of the owners, partners, corporate offers, managers and members of the business.

They also want to know if you’re enrolled in any other taxes in the state such as the Modified Business Tax – which is tied to a Nevada business that has Nevada employees; The Sales/Use Tax applies if you sell tangible goods in the state whereby you have to collect and remit the sales tax.

Use Tax means that if you bought something outside the state of Nevada and did not pay sales tax, that by law you’re supposed to report and pay the sales tax that you would have paid had you purchased the same item in the state.

Certificate of Authority relates to a retailer who does not maintain a place of business in the state, but obtains a certificate authorizing him to collect the sales tax from a purchaser here and then turns around and pays the sales tax to the state. Typically, you see this with online retail organizations.

Excise taxes apply to sales of gasoline, cigarettes, alcohol, cellphones, and vehicle registration and title fees all of which are flat per-unit taxes that must be paid directly to the Nevada government by the merchant before the goods can be sold. You must submit the Commerce Tax Additional Information Form so you will be ready to file by August 15th.

How to file for the Nevada Commerce Tax Return?

Now, let’s talk about the Commerce Tax Return in detail so that you know what you are doing. If your business’s gross revenue, that’s money earned only in the state of Nevada, ranges from zero to $3,999,999.99 cents during the state’s fiscal year which begins July 1 and ends on June 30th, the following year, you qualify for the simplified reporting. You still have to submit the tax return which may take 2 minutes to file online, but remember the really good news, there’s no tax due! Here is the link to the various Business Taxes in Nevada – https://www.nevadatax.nv.gov/

Future heads up. If you’ve always been under the four million mark and during the next fiscal year, again that’s July 1 through June 30th your status changes, meaning you now have Nevada gross revenues that exceed four million dollars, then be aware you’ll need to complete the entire tax return the next time you file. As I said, it may take two minutes to file if fall under the four million in gross revenue so let me share this quick instruction of what you’ll need to complete:

  • Fill in the taxable year (example July 1, 2015 through June 30, 2016)
  • Fill in the State Tax ID Number as shown on the Welcome Letter/upper right hand corner.
  • Fill in the NAICS code
  • Fill in the Business name
  • Fill in the Business address
  • Check the box: I declare that the Gross Revenue from engaging in business in Nevada of the above Business Entity did not exceed $4,000,000 during the taxable year.
  • SKIP TO BOTTOM OF FORM: Check the ‘Under Penalty of Perjury’ box, sign, put in your phone number, name, title and date.
  • PRINT THE RETURN for your records.

Then Hit the Submit via email button to complete the filing online, or you can mail it to the Nevada Department of Taxation

Please make sure you task yourself to file the tax return every August 15th, because the state will not send any reminders. Also, make sure you keep copies of your returns for a minimum of four years, however I recommend you keep them for as long as you have the business.

Now, let’s move onto those businesses that have Nevada Gross Revenue that Exceeds Four Million dollars. The date to file is still August 15th and of course, you have to pay the commerce tax which is based on the rate associated with your NAICS code. You can request an extension to file for up to 30 days without penalty but, if there are any taxes due, interest will accumulate along with any penalties assessed after the 30-day extension expires.

If you’re a Nevada resident and your business is incorporated outside of Nevada, you should complete the Nexus Questionnaire to determine if you are subject to the commerce tax. Most likely not, but you better make sure. Here is the link to it – http://tax.nv.gov/uploadedFiles/taxnvgov/Content/FAQs/COM_nexus_questionnaire.pdf

I can’t even begin to describe how complicated they’ve made the ability to calculate the tax which for some there is at least a few tax credits and/or industry-specific deductions that can be applied against the gross revenue. I’m going to recommend you use the services of a tax professional and maybe more specifically a Nevada based tax professional to prepare your commerce tax return because remember this return is based on the gross revenue you generated during the state of Nevada fiscal year end, not your company’s regular fiscal year end. We can, of course, offer some great recommendations for our clients.

One note of caution. If you have or are going to go out of Business in the State of Nevada, I suggest you call us here at Sage International to provide assistance with properly dissolving the company. Think about it, without properly dissolving and filing final tax returns, both the IRS and the State of Nevada have every reason to believe you are still in business and are legally required to file annual tax returns.

Since there’s no getting around the requirement to file, I wanted to make sure everyone who has a Nevada corporation or Nevada LLC understands the full meaning of “staying in compliance.”

Items to consider

Other than what has been explained above, there are some things that you would have to keep in mind so that you file the Nevada Commerce Tax Return in the right way. These are the things that you would need to consider:

  • The fiscal year for the commerce tax is July 1 – June 30, regardless of your own tax year, and reporting can be cumbersome for many entities. Consider how to tailor reporting processes to comply.
  • In the event of an audit, you are responsible for the actual expenses or costs to execute the audit. Entities that keep records outside the state of Nevada are liable for an “amount equal to the allowance provided for state officers and employees while traveling outside of the state for each day or fraction thereof” during an examination.
  • Establish the correct NAISC code on the tax return, as it can be cumbersome to change the code for future filing periods. The commerce tax has 26 business categories.
  • Specific exclusions and deductions are listed, although be careful when determining any deduction to the commerce tax.
  • The commerce tax is set on a separate entity basis, and no guidance is set for consolidation or combination.

Conclusion

The doubling of the annual license fee for corporations is quite hefty, and will probably cause some entrepreneurs to rethink the popular trend of incorporating in Nevada.

If you’re wondering where to incorporate or form an LLC, here’s the advice I have been giving small business owners for years. And this advice hasn’t changed because of the new Nevada commerce tax policy. If you’re a small business (less than five shareholders), it is generally best to form your business in whatever state you live in or operate your business from.

The bottom line is that you are going to be subject to the tax laws and pay corporation maintenance fees for whatever state you conduct your business in. So if your business is located in California and conducts business there, you can’t escape paying state taxes to California just because you incorporate in Wyoming or South Dakota. Contact IncParadise to know more!

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