Commentary - November 2003

How Much Business Tax Will You Owe?

It’s Anybody’s Guess

by Lyle Brennan

Do you sometimes get confused about what you’re doing? Maybe you feel overwhelmed by job responsibilities and deadline pressures. If you want to feel better by comparing yourself to people who are really stressed out and mixed up, consider your taxpayer-supported Department of Taxation. Ever since the legislative session ended, these state workers have been struggling to formulate the language for the new tax regulations, and it’s hard to say when they’ll finally be finished.

For example, most business owners know that we now (as of October 1) have a new tax on payroll, which is either 0.7 percent or 2 percent, depending on whether your company can be classified as a financial institution. Premiums are supposed to be reduced dollar-for-dollar by the amounts we pay for health insurance coverage for our employees. This doesn’t sound too bad so far. But the Department of Taxation has been struggling since this summer to define every possible term, consider every exception to the rule, answer every possible question and close every loophole. It has been conducting workshops according to the open meeting law, requesting input from all interested parties.

The end result? Nevada’s business owners still have no idea how much money they’ll have to pay when the forms for this new law are sent out in December. Since the tax took effect October 1, they’ll have to pay taxes for October, November and December by the end of January. So, how do you budget this amount? If you’re closing your fiscal year on December 31, how much accrued tax does your CPA post on your books? You could call the executive director of the state Department of Taxation, like we did, and ask him. Guess what? He doesn’t have any idea either.

As of mid-October, Executive Director Chuck Chinnock still has as many unanswered questions as the rest of us. The department’s workshops, which are scheduled to run through November 21st, still have to pin down such basic points as how to determine what constitutes a financial institution. According to what I read about the new tax, a financial institution, which has to pay the higher rate, can be any company engaged in investing. How does that work? Does that apply to people who make their income investing in real estate? And then there is the question of what kinds of insurance coverage will qualify for a deduction. For example, if your company pays for vision and dental, can you count that as health insurance, or does the exemption only apply to basic coverage? Does coverage for dependents count, or just insurance for the employee? Mr. Chinnock won’t know until all these workshops are completed, and he admits more workshops may be necessary after the one now scheduled for November 21st .

"We’re very concerned about getting the word out to taxpayers and their CPAs," he said. "But, by the same token, we want to give them accurate information." Here’s how the process works: the Department of Taxation holds public workshops to discuss definitions, exceptions, etc. If it looks like everybody agrees on the language of the new regulations, they are sent to the Legislative Counsel Bureau (LCB) for review. The final language of the regulation is then blessed by everybody and signed by the governor. If the department can’t make up its mind on language right away, a rough draft can be sent to the governor for signature as an "emergency regulation." The Department of Taxation then has 120 days to come up with what Mr. Chinnock calls "semi-permanent language" which is good enough to get okayed by the LCB and written into law.

The new payroll tax isn’t the only tax going through this process. Every bill passed this session that affected taxation in any way is also grinding its slow and tortuous way through this series of meetings and committee decisions. If you’re interested in attending any of these workshops, you’ll find the schedule on the Department of Taxation Website, http://tax.state.nv.us. There, you’ll see meetings scheduled to consider the definition of terms like "improvement", "extraction method" and "cost of development method".

At some point, hopefully during our lifetimes, this bureaucratic process will finally conclude and the owners of Nevada businesses will be able to determine just how many pounds and ounces of flesh they owe to the state government. Maybe we should just send them a blank check and let them fill in the amount.

Lyle Brennan Publisher
COMMENTS? email: lyle@nbj.com