State braces to pay millions in tax refunds

By David McGrath Schwartz

Wednesday, May 12, 2010 | 2 a.m.

The state, already estimated to have a $2.5 billion to $3 billion shortfall when the 2011 Legislature convenes in less than a year, might see that tally rise by hundreds of millions of dollars.

Some of Nevada’s largest, most powerful corporations are going after $358 million in taxes and interest they paid to the state on comped casino meals, corporate jets and coal used in Nevada power plants, according to documents obtained by the Sun.

The three separate issues are in various stages of litigation and have been noted, if not addressed, by lawmakers. But for the first time, the Legislative Council Bureau has tallied government’s potential liability.

Of the $358 million, $155 million is money that local governments would have to refund to the companies that paid those taxes. The state would be on the hook for the rest.

The figures come as state government is reeling financially, its economy is struggling to find traction and there appears to be little substantive debate among elected officials or candidates about how the Legislature should close its budget hole in 2011.

Because of taxes set to expire in 2011, and one-time solutions like the use of federal stimulus money and budgeting gimmicks, the governor’s budget office estimates that the gap between revenue and projected spending will be $2.5 billion to $3 billion for the state’s two-year $6.4 billion general fund budget.

But the state’s liability might not end there. The Legislature during its 2010 special session took $64 million in tax dollars paid by Clark County businesses that had been designated for a scrapped water pipeline. Some of the parties who paid those fees have sued the state, saying the money was collected for a specific purpose and can’t legally be diverted to other ends.

Additionally, state officials believe some of the tax cases could set a precedent, leading to more lawsuits seeking tax refunds.

Harrah’s has sued the state to recoup sales tax it paid on three corporate jets it bought between 2005 and 2007, arguing it shouldn’t have to pay taxes on the aircraft because the planes first landed outside Nevada and were used for interstate commerce. Harrah’s is seeking $5.7 million from the state and schools and $4.6 million from local governments on taxes it paid on those planes, according to a memo prepared by the Legislative Council Bureau.

Officials expect that if Harrah’s wins the suit, other companies with planes would also apply for tax rebates.

Among the other potential liabilities:

• In a case pending before the Nevada Supreme Court, Southern California Edison has argued that coal purchased out of state should not have been taxed. NV Energy has also requested a rebate. In total, the companies are seeking $80.7 million from the state and $57.5 million from local governments. The Legislature set aside tens of millions of dollars to hedge the possibility of a loss in court but used that money for previous attempts to balance the budget.

• Casino companies have sought refunds on taxes paid on meals comped to guests and employees. The Nevada Supreme Court ruled in favor of a Northern Nevada casino in 2008. Other casino companies followed suit, and those cases are making their way through the administrative process. The state would have to pay back an estimated $203 million and local governments $155 million, according to the memo.

Lobbyists anticipate a major fight over taxes during the 2011 session, along with deep cuts to balance the state budget.

The gaming industry, which for decades has been the major funder of state government, fought efforts to raise its taxes during the 2010 special session. Lobbyists for the industry refused to agree to a $30 million increase in regulatory fees. And legislators quickly folded.

Assemblyman Tick Segerblom said casinos have stopped paying taxes on comped meals as they did in the past.

“Everybody cries that they’re overtaxed, we need a broad-based business tax, which is fine,” he said. “The reality is, gaming is paying less today ... because of that ruling. Just putting that back on the table is significant. It’s important to realize that everybody has gotten some benefit. Nobody is pure here.”

Other legislative leaders, such as Senate Majority Leader Steven Horsford, declined to comment because they had not yet seen the memo.

Billy Vassiliadis, a lobbyist for the Nevada Resort Association, dismissed any suggestion that the casino industry should back off its tax cases because the state is hurting, as well as private grumbling from lawmakers about the industry’s legal actions.

He noted that the resort association offered to work with the state on a payment plan as the state refunds the tax on comped meals.

“For the contributions the industry makes to this state — nearly half of its budget — it would be a shame if legislators got angry over an industry pursuing its right against unfair and unlawful tax collection,” he said. “The industry is very sympathetic to the state’s economic problem. We’d ask them to be sympathetic to the financial struggles and anxiety the industry has been going through.”