Nevada imposes a Commerce Tax on gross revenues.1 It also imposes a payroll tax—the Modified Business Tax.2 Nevada’s problem, which has triggered numerous refund claims, is that it has connected the two taxes with a credit in a way that favors companies with in-state payroll.3 The bottom line is that a company with in-state payroll is able to mitigate up to half of the economic burden of the Commerce Tax, whereas a company with payroll concentrated in other states is not. Courts have found that this kind of “tandem tax” regime fails the test for internal consistency because it favors in-state companies (with all their sales and payroll in Nevada) over multi-state companies (with sales in Nevada but payroll in other states). For example, in California, a tandem tax regime similar to Nevada’s (involving a gross receipts tax and a payroll tax) was found to violate the internal consistency test.4 The courts have remedied similar internal consistency violations either by invalidating the tax altogether, or by computing it in a way that fixes the internal consistency problem. One remedy that we have advocated for clients is to allow a credit against their Commerce Tax liability for the hypothetical Modified Business Tax that they would have paid if they had concentrated their payroll in Nevada. In most situations, this would result in a 50% reduction in the Commerce Tax.
We have been handling several of these refund claims in appeals and negotiations with the Nevada Department of Taxation. If your company paid Nevada Commerce Tax and has its payroll concentrated outside Nevada, it should consider filing a refund claim for the tax year ended June 2019 by the July 31, 2022 deadline to protect its rights.
Consider downloading and using our model refund claim to preserve your company’s rights. Instructions for filing are available on the website for Nevada’s Department of Taxation, in applicable regulations, and in applicable laws. If you have any questions or would like assistance, please contact one of the authors of this alert or another member of Reed Smith’s State Tax Group.