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Nevada’s aggressive Commerce Tax policy: Imposition of higher tax rate on out-of-state manufacturers than in-state manufacturers

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Page d'accueil Perspectives Nevada’s aggressive Commerce Tax policy: Imposition of higher tax rate on out-of-state manufacturers than in-state manufacturers
Yes, you read the title correctly. And no, states are not permitted to do what Nevada is doing. Imposing a higher tax rate on an activity conducted outside the state than the same activity conducted inside the state is clear discrimination against interstate commerce that violates the Commerce Clause of the U.S. Constitution. (And that’s not even the only constitutional problem with the commerce tax!)

Under Nevada law, the “manufacturing” tax rate of 0.091% applies to business entities primarily engaged in the transformation of materials, substances, or components into new products for sale.1 In contrast, the “wholesale trade” tax rate of 0.101% applies to business entities primarily engaged in wholesaling goods without transformation.2 So, the wholesale rate is around 11% higher than the manufacturing rate.

The policy of the Nevada Department of Taxation (the Department) is that manufacturers that make sales into Nevada but whose plants—where the transformation into new products occurred—are located outside Nevada must pay tax at the higher wholesale rate. According to the Department, the lower manufacturing rate only applies to business entities with manufacturing plants located inside Nevada. This is clear discrimination that violates the Commerce Clause. A state may not impose a higher tax on an activity conducted outside the state than the same activity conducted inside the state. A state may not penalize a Taxpayer for locating activities outside the state.3

If your business is a manufacturer making sales into Nevada, the U.S. Constitution protects your right to apply the manufacturing tax rate regardless of whether your manufacturing operations are located inside or outside Nevada. If your business conducts its manufacturing activity at facilities outside of Nevada and the Department asserts that it must apply the wholesale rate because it does not have manufacturing operations within Nevada, you should consider challenging this assertion.

And, setting aside the discriminatory application of the wholesale rate to out-of-state manufacturers, if your business paid any amount of commerce tax, it may be entitled to a refund of as much as 50% of the tax, because the method used by the Department to compute the tax violates the Commerce Clause test for internal consistency. If you have paid any commerce tax, you should consider filing a refund claim to recover the tax. Contact the authors to discuss how that process works.