Money Management - September 2003

Nevada’s New Tax Structure

What Does It Mean for Employers?

by Kirk Gardner

As I write this at the end of July, it is little more than a week since Governor Guinn signed Senate Bill 8 into law and Nevada’s business tax structure was changed. By the time you read this, some of the issues may have become more – or less – clear. Given that, what follows is a first look at some of the provisions of (and questions surrounding) the new law.

Let’s start with the positive news that the Nevada Business Tax, which required a payment of $25 per quarter per equivalent full-time employee, has been repealed effective October 1, 2003.

Unfortunately, it’s been replaced on that same date with an annual state business license fee of $100, and a quarterly excise tax on wages paid (wages here being the same as those reported for unemployment tax purposes, but without the limit used in that tax). The excise tax cannot be deducted from the employees’ wages, but must be borne by the employer. That excise tax will be 0.7 percent of wages for most employers, but will be 2 percent for wages paid by certain "financial institutions."

What exactly is a financial institution? Early reporting referred to that 2 percent as a tax on banks, and they are certainly included, but the definition in the law is much broader. Brokers and dealers in securities and commodities contracts fall under the definition, as do investment advisors. Holding companies for bank securities are included, but so, potentially, are other holding companies. Also included under the definition of "financial institution", and thus subject to the higher excise tax, is any person primarily engaged in (among other activities):

Furnishing space and other facilities for trading in securities or commodities;

Furnishing services to holders of or dealers in securities and commodities;

The management of the money of trusts and foundations;

Investing in oil and gas royalties and leases;

Owning or leasing franchises, patents and copyrights; and

(here’s the kicker) Investing.

I suspect the reason for the inclusion of these categories is to block financial institutions from structuring their business in such a way as to avoid the higher tax, but the inclusion of a broad category such as "any person primarily engaged in investing" is disturbing. However, it is important to remember that the tax applies to wages paid in these activities, and individual investors who don’t pay wages shouldn’t have to worry.

The amount of wages subject to the tax (at either level) may be reduced by the amount the employer pays for employee health insurance premiums. Employers who provide health coverage through self-insurance can deduct actual costs (including direct administration costs and stop-loss premiums) but only if the program is a qualified employee welfare benefit plan under ERISA. That usually means the plan must be written and copies provided to the employees, and some reporting may be required as well. Self-insured employers will need to review their situations to make certain they qualify.

Since the employer will be required to provide some proof of employee health costs paid, some have noted that care will be needed to avoid violating any confidentiality rules associated with medical records.

The law also provides that qualifying new or expanded businesses may be able to get an exemption for 50 percent of the tax, but only beginning July 1, 2005. Apparently this provision is not applicable to financial institutions paying the higher tax.

It has been said the only things certain in life are death and taxes. Add to that the certainty that there will always be more for all of us to learn and understand with each new tax law.

Kirk Gardner
Kirk Gardner, CPA, MST, is a shareholder with Kafoury, Armstrong & Co. specializing in tax issues.