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September 15, 2014

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POLITICS:

Small-business owner sounds alarm over proposed Nevada business margins tax

Sandwich shop owner Tim Wulf has been foretelling doom in Nevada should voters approve a 2 percent business margins tax at the polls this November.

He has been telling the media that his two Jimmy Johns franchises in Reno would get hammered with a $30,000 tax bill should voters pass the tax. It’s being peddled by the Nevada teachers union as a way to help the state’s ailing education system.

Wulf, a politically involved former economics professor, is carrying the banner for the Coalition to Defeat the Margins Tax, a group backed by the Las Vegas Metro Chamber of Commerce as well as gaming, mining and retail industry alliances. Although big businesses are funding the fight, Wulf says it’s really the employees and customers of small businesses such as his who will get hit the hardest.

“It’s easy to say that big business should pay for your children's education,” he said. “It’s a nice thing to say, but we’re going to tax businesses in a fragile economy.”

So how badly will a new $30,000 tax liability clobber Wulf’s business?

The answer takes a few calculations and some explanations of a complicated tax, but the bottom line, Wulf says, is that you might have to pay more for sandwiches; otherwise, some employees of his will lose their jobs.

“What we know is that business, to survive, will have creative responses, and none of those responses will be good for payroll or will be good for pricing," he said. "There will be higher prices and fewer jobs.”

Why?

Wulf says that he annually sells about $2.4 million worth of sandwiches at his two stores. The tax would apply to him because it’s levied on any business that brings in more than $1 million a year.

The state teachers union, the Nevada State Education Association, estimates the tax will generate about $400 million a year, and that money would be deposited in the state’s Distributive School Account. In other words, the money gets dropped in the state’s education piggy bank.

To calculate how much Wulf would have to pay under the Education Initiative — the formal name of the 2 percent business margins tax on the ballot in November — Wulf first gets to deduct his payroll costs or costs of goods sold, or take a standard deduction of 30 percent.

The business owner naturally will take the largest deduction possible among those three options.

Wulf says the 30 percent deduction makes the most sense for him.

The payroll tax he owes the state gets rolled into the 2 percent margins tax, so his total tax liability comes to about $30,000 under the proposed tax.

Business groups are having a difficult time predicting what the tax will do to the economy because the potential effect of the tax differs with each business.

“You put three CPAs (Certified Public Accountants) and three attorneys in a room and you will get six different answers on a business’s margin tax liability,” said Karen Griffin, the spokeswoman for the Coalition to Defeat the Margins Tax. “It’s so poorly written that it’s being interpreted in a number of ways.”

But each side of the campaign is trying to make it as easy to understand as possible.

The opposition to the margins tax has launched a website that will tell you why the tax is awful and why you should vote against it.

They say the tax is too complex, would tax even unprofitable businesses, would cause Nevadans to lose their jobs and would not guarantee better schools. Read the talking points for yourself here.

Proponents of the tax will tell you that Nevada’s schools are failing, Nevada has a very low business tax environment, and major corporations are shipping profits out-of-state without paying anything for the privilege of doing business in Nevada.

As is the case with the opposition, you can read the proponents’ arguments here.

Wulf said he understands the potency of an argument that alleges that big businesses just want to protect their profits.

But he said that passing the margins tax will actually help those big corporations at the expense of local small businesses.

“In their effort to attack Wal-Mart, they’re just going to strengthen Wal-Mart,” he said.

Why?

Wulf says Wal-Mart is so big that it can absorb the tax. But small-business owners may have to raise prices because of the tax, and that will put them at a competitive disadvantage with Wal-Mart.

Analysts for both opponents and supporters of the tax say that most Nevada businesses won’t be subject to the tax. But the businesses that are subject to the tax employ the vast majority of Nevadans.

Wulf’s sandwich shops fall into a category of small businesses such as convenience stores that employ relatively few people but bring in more than $1 million. He said he’d possibly have to lay off some of his 70 employees to comply with the tax.

He wouldn’t say whether his business was profitable, but he said it’s not fair to tax businesses that are unprofitable.

Dan Hart, a consultant advocating for the tax on behalf of the Nevada State Education Association, maintains that most businesses prefer low profits in order to minimize their federal income tax liability.

Hart said that businesses ought to be subject to a Nevada tax in the same way the government asks Nevadans to pay taxes.

“They don’t ask us if we’ve got enough money or if we’ve been profitable,” he said. “They don’t ask us if we can afford it when they make us pay sales tax.”

The Clark County sales tax rate is 8.1 percent. Businesses say they’ll pay an effective tax rate much greater than 8.1 percent under the margins tax.

Although Wulf won’t discuss his profits, a $30,000 margin tax liability could easily be a 12.5 percent tax on corporate income if Wulf’s profits are 10 percent of his $2.4 million annual revenue.

Sound complicated?

Get ready for more of this.

Economists are already concerned that the public won’t understand the political campaign ahead.

“A concern for every business owner should be the debate that is shaped over this well-meaning legislation,” wrote John Restrepo of RCG Economics and Mike PeQueen of Hightower Las Vegas in a recent analysis. “While we can articulate clearly to legislators, the public battle that ensues is one of sound bites to the residents of Nevada.”

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