By Don L. Ross, 1997
A. INTRODUCTION
B. SALES TAX - MAJOR CONCEPTS
C. USE TAX
D. EXEMPTIONS
E. DEFERRAL, ABATEMENT AND CREDITS FOR CAPITAL PURCHASES.
A. TAXPAYERS REQUIRED TO FILE RETURNS.
B. PAYMENT OF THE TAX.
C. DUE DATES.
D. FILING AND PAYMENT BY MAIL.
A. INTRODUCTION
B. CONSTITUTIONAL PROVISIONS
C. TAXATION OF GOODS AND SERVICES IN INTERSTATE COMMERCE.
A. AIRPLANES.
B. SOFTWARE.
C. MANUFACTURING.
D. LEASING AND FINANCING.
E. CONTRACTORS.
F. CHARITABLE AND NON-PROFIT INSTITUTIONS.
G. SERVICES VS. TANGIBLE PERSONAL PROPERTY.
H. OTHER EXEMPTIONS AND EXCEPTIONS.
I. THE FOOD EXEMPTION
A. THE DEPARTMENT OF TAXATION AND ITS OPERATION.
B. AUDIT FUNCTIONS AND PROCEDURES.
C. DEFICIENCY DETERMINATIONS.
D. THE APPEAL PROCESS.
E. OTHER DETERMINATIONS
F. PENALTIES AND INTEREST.
G. CIVIL PENALTIES.
H. CRIMINAL PENALTIES.
Nevada, like most states, imposes sales and use taxes - an integrated tax base on a broad variety of transactions. Nevada sales tax is imposed on all retailers for the privilege of engaging in the business of selling tangible personal property in Nevada. A compensatory use tax is imposed on the purchase from a retailer of tangible personal property outside of the State of Nevada for the privilege of storing, using or consuming such property within Nevada.
Nevada sales and use taxes are a significant source of revenue for the State of Nevada, accounting for nearly one-third of the State's general fund revenues.
Significant Issues.
Significant sales and use tax issues to consider (which will be covered during the program):
1. What types of transactions are subject to Nevada sales or use tax?
a. Are there any exclusions or exemptions available?
b. Can the transaction be restructured to minimize the tax burden?
2. Who are the buyer and seller?
a. Is the buyer or seller exempt?
b. Can the transaction be restructured to minimize the tax burden?
3. Where is the sale occurring (i.e. where and when does title pass)?
a. Is the sale occurring in Nevada or outside of Nevada?
b. Can the transaction be restructured to minimize the tax burden?
4. Who has the obligation of paying the tax to the State of Nevada and who bears the economic burden of such payment?
a. Does Nevada have jurisdiction over the vendor? "Nexus" issues.
b. Can the transaction be restructured to minimize "nexus" issues and/or minimize the tax burden?
5. Recurring transactional issues.
a. Is the transaction a taxable sale of tangible personal property or a nontaxable service or sale of intangible personal property?
b. Exemption issues.
Statutory and Interpretative Source Materials
Nevada sales and use taxes are imposed by Chapters 372, 374, 376A, 377 and 377A of Nevada Revised Statutes. Statutory references in this outline are to sections of the Nevada Revised Statutes ("NRS"). Regulations interpreting the sales and use tax provisions are promulgated by the Department of Taxation and the Nevada Tax Commission and are found in the Nevada Administrative Code ("NAC").
a. Source material.
i. CCH Nevada Tax Reporter.
Sales and Use - ¶ 60-010 et seq.
Administration - ¶ 61-200 et seq.
ii. WESTLAW and LEXIS: Coverage includes Nevada Constitution, Nevada Revised Statutes, Nevada Supreme Court Decisions, Attorney General Opinions, and Nevada Administrative Code.
b. Other Sources.
Hellerstein, State Taxation: Sales and Use, Personal Income and Death and Gift Taxes (1992) (with supplements).
Multistate Tax Commission publications.
Multistate Tax Analyst, Corporate Tax Publishers, Inc.
Sales & Use Tax Review, Corporate Tax Publishers, Inc.
Journal of Multistate Taxation, Warren, Gorham & Lamont, Inc.
Sales and Use Tax Alert, State Taxation Institute.
Sales and Use Tax Desk Book 1994-1995 Edition, ABA Section of Taxation.
1. Historical Overview of Nevada Sales and Use Tax Provisions
a. General History. Under the Nevada Constitution, the taxing power may be exercised only by the Legislature. Article IX, Section 2, Nevada Constitution. The Sales and Use Tax Act was first adopted in 1955 and approved by referendum of the voters in 1956. The Local School Support Tax was added in 1967; the City-County Relief Tax in 1969; and local county option taxes for public mass transportation and promotion of tourism authorized in 1981. The 1991 Legislature authorized a county option tax for conservation of open space land.
b. Presumptions. Statutes and Regulations imposing the tax and making certain classes of property or forms of transaction taxable are construed in favor of the taxpayer. State Department of Taxation v. Visual Communications, Inc., 108 Nev. 721, 836 P 2d. 1245 (1992). Generally exemption statutes are to be construed against the party claiming the exemption and the burden of proof is on the person claiming the exemption. Sierra Pacific Power Company v. Department of Taxation, 96 Nev. 295 (1980); Shetakis Distributing v. State Department of Taxation, 108 Nev. 90 (1992); Great American Airlines v. Nevada State Tax Commission, 101 Nev. 422, 705 P 2d. 654 (1985), cert. denied 479 U.S. 817, 107 S. Ct. 74, 93 L.Ed.2d 31 (1986)
c. Current Provisions
i. Sales tax--NRS Chapter 372. The State of Nevada imposes a sales tax upon retailers in connection with the sale of tangible personal property at retail. NRS 372.105.
ii. Use tax - NRS Chapter 372. The State of Nevada imposes a use tax upon the storage, use or other consumption of tangible personal property in the State of Nevada if such property is purchased outside of Nevada in a transaction which would have been a taxable sale if made in Nevada. NRS 372.185
iii. Local School Support Tax - NRS Chapter 374. Imposition of an additional sales and use tax under provisions virtually identical to regular sales tax specifically for the support of County school districts.
iv. City-County Relief Tax - NRS Chapter 377. Imposition of an additional sales and use tax under provisions identical to Local School Support Tax specifically for the relief of the financial burden of cities and counties v. Local Taxes for Mass Transit and Tourism - NRS Chapter 377A. Imposition of an additional sales and use tax under provisions identical to Local School Support Tax at the option of certain counties for mass transit and/or the promotion of tourism.
vi. Local tax for conservation of open space - NRS Chapter 376A. Additional tax of .25% of one percent for conservation of open space adopted by counties having a population of between 100,000 and 400,000.
In the following discussion, unless otherwise indicated, use of the terms "sales tax" or "use tax" or "sales and use taxes" are all descriptive terms that encompass all of the taxes described above.
c. Current rates.
i. Sales tax - 6.5 % statewide rate, made up of:
2% basic sales tax, NRS 372.105, plus 2.25% Local School Support Tax, NRS 374.110, plus 2.25% City-county Relief Tax, NRS 377.040.
ii. Use Tax - 6.5% statewide rate made up of same components as statewide sales tax rate. NRS 372.185, NRS 374.190; 377.040.
iii. Additional optional county sales and use taxes under NRS Chapter 376A and 377A: .5% of one percent for mass transit; NRS Chapter 377A; .25% of one percent to promote tourism at the option of Counties with a population of less that 400,000, NRS Chapter 377A; .25% of one percent for conservation of open space at the option of Counties with a population of between 100,000 and 400,000, NRS Chapter 376A.
d. Exemptions. The Nevada Revised Statutes contain a series of exemptions from the application of both the sales and use tax which are found at NRS 372.260 through 372.350. Exemptions common to both the sales and use tax under all operable chapters of the NRS include:
i. Sales in interstate or foreign commerce. Passage of title issues. Aircraft and vehicles.
ii. Sales to Federal and Nevada governments and political subdivisions.
iii. Sales to religious and charitable organizations.
iv. Agricultural exemptions.
v. Food for human consumption.
vi. Fuels, gas, electricity and water.
vii. Net proceeds of mines.
viii. Mobile homes.
ix. Aircraft and component parts of Nevada-based airline.
x. Occasional sales
xi. Other exemptions
In addition, under the use tax, if a Nevada sales tax has been paid in connection with a purchase, the storage, use or consumption in Nevada of the subject property is exempt from the use tax. In addition, the sales of ocular and ophthalmologic devices are exempt under The Local School Support Tax and by extension, to the City-County relief tax, and the additional county option taxes, but not exempt under the regular sales and use tax imposed by Chapter 372.
1. Retailers - NRS 372.055
a. General definition. NRS 372.055 imposes the tax on a "retailer." There are several components of this definition:
i. Auctioneers. An auctioneer is deemed to be a "retailer" since he is in the business of making retail sales.
ii. "Sellers." In the case of a person other than an auctioneer, in order to be a "retailer" the person must be a "seller." The definition of a "seller" is somewhat circular: a person "engaged in the business of selling tangible personal property of a kind, the gross receipts from which are required to be included in the measure of the sales tax." NRS 372.070. A "business" includes any activity having an "object of gain, benefit, or advantage." NRS 372.020.
iii. Sales for storage, use and consumption. NRS 372.055(1)(b) classifies as a "retailer" any person engaged in the "business" of making sales for storage, use or consumption, and auctioneers making such sales.
iv. Two-sale presumption. Under NRS 372.055 there is a statutory presumption that "[e]very seller who makes any retail sale or sales of tangible personal property . . . . and . . . [e]very person making more than two retail sales of tangible personal property during any 12-month period, including sales made in the capacity of assignee for the benefit of creditors, or receiver or trustee in bankruptcy . . ." is a "retailer." This rule has been applied to financial institutions selling repossessed property. AGO 691 (11-6-1970). Any person who qualifies as a "retailer" must obtain a seller's permit and the pay sales tax on such sales. AGO 691 (11-6-1970).
2. Retail Sales
a. "Sales." NRS 372.060 defines what is considered to be a "sale" for purposes of the sales and use tax law. Under this provision, a "sale" includes any transfer of title or possession, exchange, barter, lease or rental, of tangible personal property for consideration. The statute provides that the terms "transfer of possession", "lease" or "rental" as used in the context of the definition of a "sale" includes only transactions found by the Nevada Tax Commission to be in lieu of a transfer of title. id. Similarly, a transaction in which possession of property is transferred but title is retained as security will be treated as a "sale." Id.
By regulation, the Nevada Tax Commission has elaborated on what type of leasing transaction will be considered a sale. Under NAC 372.070 if a lease or rental is determined to be a sale, then it is treated as a conditional sale under the rules of NAC 372.050, discussed at 4.b., below. A more complete discussion of the lease rules is contained in that portion of these course materials entitled "Application of Sales and Use Taxes to Particular Businesses and Taxpayers." Certain forms of sale and leaseback transactions can be exempt from the sales tax. see, NAC 372.085.
b. Retail Sales. In defining the term "retail sale," NRS Section 372.050 excludes property purchased "for resale in the regular course of business." All sales are presumed to have been retail sales. NRS 372.155. Under this statute the burden is on the person making the sale (the retailer) to prove that the sale is nontaxable unless the seller takes from the purchaser a resale certificate. Under NRS 372.160, a resale certificate will relieve the seller from the burden of proof only if the seller takes the certificate in good faith from a person who is in the business of selling tangible personal property. In addition, the statute requires that the seller that the purchaser intended to resell the goods, or if that at the time of sale, it is unclear whether the property will be sold or will be used for some other purpose. NRS 372.160. AGO 89-17 (11-8-89).
The intent of this statute appears to be to keep the burden on the seller to pay the sales tax even if he takes a resale certificate where the tangible personal property sold to the purchaser is not of a kind which is regularly sold by the purchaser in the normal course of the purchaser's business. If a purchaser does give the resale certificate, and hold property for other than retention, display or demonstration while holding it for sale in the regular course of business, the purchaser must pay a use tax. NRS 372.170. It id only if the purchaser does not pay this use tax that the seller is liable for the sales tax with respect to the property so purchase. Id. A purchaser who gives a resale certificate when he knows the property will not be resold is guilty of a misdemeanor. NRS 372.175.
Section 2, Art. V, of the Multistate Tax Compact, §32.200, complements the above provisions:
Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction.
Nevada does accept exemption certificates issued under authority of the Multistate Tax Compact if, to the best of the seller's knowledge, the property is being taken out-of-state for resale. see, CCH Nevada Tax Reporter, @ ¶60-050.
c. Form of Resale Certificate. A form of resale certificate is set forth in NAC 372.730.
d. Occasional Sale Rule. NRS 372.320 provides that, "[t]here is exempted from the taxes imposed by this chapter the gross receipts from occasional sales of tangible personal property and the storage, use and other consumption in this state of tangible personal property, the transfer of which to the purchaser is an occasional sale." An "occasional sale" is defined as follows:
"Occasional sale" includes:
(1) (a) A sale of property not held or used by a seller in the course of an activity for which he is required to hold a seller's permit, provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.
(b) Any transfer of all or substantially all the property held or used by a person in the course of such an activity when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer.
2. For the purposes of this section, stockholders, bondholders, partners or other persons holding an interest in a corporation or other entity are regarded as having the "real or ultimate ownership" of the property of such corporation or other entity. NRS 372.035
As noted above, a "seller" includes a retailer "making more than two retail sales of tangible personal property during any twelve (12) month period . . ." NRS 372.055(1)(c), 372.070. The attorney general has essentially interpreted the occasional sale rule in tandem with the two-sale presumption of NRS 372.055(1)(c). AGO 691 (11-6-1970).
The only case interpreting this statute is Nevada Tax Commission v. Bernhard, 100 Nev. 348, 683 P.2d 21 (1984). In that case, the seller was engaged in the business of selling model airplanes (i.e. it was a "retailer" of model airplanes). However, the seller owned a real airplane. The court held that the sale of the real airplane was exempt as an occasional sale, since the retailer was not in the business of selling real airplanes.
e. Incorporations and Reorganizations. Under paragraph (b) of NRS 372.035, the transfer of "substantially all the property" of a business will not be subject to tax if after the transfer the "real or ultimate ownership" is substantially similar. NRS 372.035(2) attributes the "real or ultimate ownership" of property held by an entity to the entity's "stockholders, bondholders, partners or other persons owning an interest in the . . ." entity. The term "substantially all the property" has not been defined by statute or regulation, nor has the requirement that after the transfer the real or ultimate ownership be "substantially similar."
It seems clear that a sole proprietor can transfer all of his assets to a wholly owned corporation. Partners could contribute all of the assets of their partnership to a corporation or an LLC owned by the partners in the same proportions as their ownership of the former partnership interests.
The Internal Revenue Code ("IRC") has a "substantially all" of the assets requirements in connection with a tax free reorganization effected under IRC section 368(a)(1)(C). The IRS has established a "90/70 rule" for advance ruling purposes. In the IRS' view, the "substantially all" requirement is satisfied if there is a transfer of assets representing 90% of the fair market value of the net assets (i.e., gross assets less assets retained to meet liabilities) and at least 70% of the gross assets held by the corporation immediately before the transfer. In the context of a tax free incorporation, an 80% test is applied to the ownership of a corporation in order to effect a tax free incorporation, and control for purposes of the tax free reorganization provisions is 80%. See, IRC §§351 and 368(c).
The occasional sale rule as applied to transactions which do not effect a substantial change in ownership in the underlying assets arguably applies in transfers otherwise satisfying the requirements of tax free incorporations under IRC §351, and to certain forms of corporate reorganizations under IRC 368(a), if properly structured. Specifically, reorganizations under IRC section 368(a(1)) subparagraphs A, B, C, D, and F, may qualify for the occasional sale treatment so long as the shareholders of any corporation disappearing in such a reorganization (A and C reorganization) own at least 80% of the stock in the surviving corporation and "substantially all" of the assets of the disappearing corporation are transferred to the acquiring corporation. In addition, in a B reorganization, if the shareholders of the acquired corporation own 80% or more of the stock of the acquiring corporation after the exchange, occasional sale treatment should clearly apply.
An "A" reorganization is a statutory merger transaction. Generally, the A reorganization is considered to provide the greatest amount of flexibility.
A "B" reorganization is the transfer of stock constituting control of the target corporation solely for voting stock of the acquiring corporation. "Control" is defined as stock constituting 80% of the combined voting power of all stock entitled to vote and 80% of the number of each class of target stock entitled to vote.
A "C" reorganization is a transfer of substantially all of the assets of the target corporation solely for voting stock of the acquiring corporation and a limited amount of other consideration. Specifically, up to 20% of the consideration received in a "C" reorganization may consist of cash or other property.
A corporation can spin-off one or more distinct businesses to its shareholders tax free under IRC section 368(a)(1)(d) [the "D" reorganization] and IRC Section 355, if certain conditions are met. A "D" reorganization can take three forms: the "spin-off", the "split-off" and the "split-up." The spin-off is the distribution by one corporation of the stock of a subsidiary, either existing or newly formed. The split-off is identical with the spin-off except that some of the shareholders of the parent corporation redeem their stock of the parent in return for the split-off corporation's stock. A split-off is essentially equivalent to a corporate stock redemption. A split-off may not qualify for occasional sale treatment because the stockholders are going their separate ways. The split-up is the distribution by a holding company of the stock of two or more subsidiaries in complete liquidation of the parent holding company. The split up probably would qualify for occasional sale treatment. The D reorganization contemplates that the shareholders have control of the transferee corporation immediately after the spin-off. See, IRC Section 361(a)(1)(D). Control for this purpose is 80%. IRC §368(c).
Finally, the F reorganization is a reorganization involving nothing more than a mere change in indentity, form, or place of organization. This type of reorganization should clearly qualify for occasional sale treatment.
3. Tangible Personal Property
a. Introduction. In general, the sales and use tax are imposed upon the sale or purchase of "tangible personal property," where such property is either sold in Nevada (sales tax) or purchased out-of-state by a Nevada resident for use in Nevada (use tax). NRS 372.195 imposes a sales tax upon every retail sale in Nevada of tangible personal property. NRS 372.185 imposes the use tax for the privilege of storing, using or consuming within Nevada any article of tangible personal property.
b. Definition. "Tangible personal property" means "personal property which may be seen, weighed, felt, or touched, or which is any other manner perceptible to the senses." NRS 372.085. Generally, three major categories are excluded from this definition: intangible property, services and real property. For purposes of Chapter 120A regarding Disposition of Unclaimed Property, the Nevada legislature has defined intangible property as including in material part:
(a) money, checks, drafts, deposits, interest, dividends and income;
(b) credit balances, customer's overpayments, gift certificates, security deposits, refunds, credit memoranda, unpaid wages, unused airline tickets, and unidentified remittances;
(c) stock and other intangible interest in business associations:
(d) money deposited to redeem stocks, bonds, etc.
(e) amounts due under insurance policies; and
(f) amounts distributable from trusts or custodials funds such as health, welfare, retirement, etc., plans.
c. Tangible Personal Property v. Real Property. Real property is not subject to sales or use tax. In Nevada it is very clear that if tangible personal property is purchased by a construction contractor for use in improving real property, that contractor is deemed to be ultimate end-user of the property. The contractor can not take advantage of the fact that he may be "reselling" the property to the owner of the property. NAC 372.200. As such, sales to contractors of tangible personal property to be incorporated in improvements to real property are subject to the sales tax. If for some reason, the sales tax is not collected, then the contractor is liable for payment of the use tax. id. This topic is covered in more detail in that portion of the course materials entitled "Application of the Nevada Sales and Use Tax to Particular Businesses and Taxpayers."
d. Intangible Property -- Computer Software and Output. The classification of computer software was a focal point of controversy for several years. However, with the adoption of Nevada Administrative Code Sections 372.850 - 372.885, the position of the Nevada Department of Taxation is clear. For a discussion of the classification of computer software, please refer to the portion of the course materials entitled "Application of the Nevada Sales and Use Tax to Particular Businesses and Taxpayers."
e. Services and Labor. As a general rule, the Nevada sales tax does not apply to services. AGO 544 (10-9-1968) However, there are many services which result in the creation, assembly or production of "tangible personal property." In Nevada, a distinction has been drawn to differntiate tangible personal property created as a result of the exercise of a high degree of skill and which has value only to the buyer from other tangible personal property. The Nevada Attorney General characterizes a transaction as a personal services contract rather than a retail sale if the following factors are present:
* a contract requiring the creation of or the transfer of title to, property requires the exercise of a high degree of skill;
* the materials involved are of relatively little value while the principal value lies in the skill of the services rendered; and
* the contract is of little or no value to anyone other than the "buyer."
Consistent with this interpretation, the Department of Taxation has promulgated regulations addressing specific types of businesses. The general thrust of many of these regulations is to make the business and not the buyer the ultimate end user of the certain identifiable tangible personal property used in creating the end-product normally produced by such businesses. In addition, as a precondition for the exclusion from sales and use tax some of these types of business are required to separately state and bill for the services rendered.
f. Businesses Specifically Subject to Regulation:
The following businesses are specifically the subject to regulatory guidance in determining what portion of their business involves the rendition of personal services and what portion involves the sale of tangible personal property:
* Advertising Agencies
* Barbers, Beauty shop owners
* Broadcasters
* Concessionaires
* Construction Contractors
* Dentists
* Desktop Publishers
* Florists
* Garment and fur repairers
* Hospitals
* Interior decorators
* Memorial dealers, cemeteries
* Morticians
* Movers
* Oculists, optometrists
* Photographers
* Photofinishers
* Printers
* Movie Producers
* Manufacturers
* Repairman and reconditioners
* X-ray film producers
* Painters, polishers, and refinishers
* Taxidermists
4. Gross Receipts
a. General Rule. The term "gross receipts" means the amounts received in consideration for the sale of the property. NRS 372.025. The gross receipts may include non-monetary benefits received by the retailer which must be reduced and valued in money or money's worth and includes, all services that are part of the sale, and any amount for which credit is allowed to the purchaser. However, cash discounts given at the time of sale are allowed to reduce the gross receipts. id. b. Conditional Sales. Under NAC 372.050, the full amount of the sales tax is due upon a sale made on credit - a conditional sale. Note that leases treated as sales fall under this rule. see, discussion at 4.e., below. No discount is allowed by reason of the fact that the retailer sells the credit contract to a third party at a discount. The gross receipts of a credit sale will include the whole amount of the contract including, insurance, interest, finance and carrying charges, unless separately stated in the contract, and only if adequate records are maintained.
In Bing Construction Company v. Nevada Department of Taxation, 109 Nev 275, 849 P.2d. 302 (1993) the court upheld the department's determination that the tax due on a conditional sale is due on the full sales price, and not just on the actual cash payments received. In 1995 the Nevada Legislature amended NRS 372.365 and NRS 374.379 (governing returns made under the Sales and Use Tax Act and the Local School Support Tax, respectively). The 1997 Legislature further amended these provisions. The net effect of these amendments is that retailers who have made a retail sale on credit, and who have paid the tax on the full sales price, but who do not collect the full sales price, are permitted to deduct the amount of sales tax previously paid attributable to the uncollected portion of the contract from the sales tax due for the then current period. NRS 372.365(4)(a), and NRS 374.370(4)(a). However, in order to qualify for this credit, the retailer must have also claimed a bad debt loss deduction under § 166(a) of the Internal Revenue Code on his federal income tax return for the uncollected amount. If the retailer claims such a credit and subsequently: 1) has his bad debt loss deduction denied by the IRS, or 2) collects all or a portion of the uncollected amount, he must include the amount of the credit in the amount of taxes reported in the first sales tax return filed after the denial of deduction or collection. NRS 372.365(4)(b), and NRS 374.370(4)(b)
c. Coupons and rebates. If a retailer accepts manufacturers coupons as part of the payment for property, and is reimbursed by the manufacture, the full sales price, unreduced by the coupon constitutes the gross receipts from the sale. AGO 82-13 (6-21-1982). Rebates paid directly to the customer by the manufacturer do not effect the calculation of the sales price. id.
d. Delivery and freight charges. Delivery and freight charges are generally included in gross receipts unless these charges are invoiced separately to the purchaser by a common carrier and title passes before shipment. NAC 372.101. A freight carrier is a common, contract, or international carrier licensed by the Nevada PSC of the US ICC. Id.
e. Leases. If a lease transaction is the equivalent to "capital" lease then the sales tax due on in the same manner as if the transaction was a conditional sale described in NAC 372.050. NAC 372.070. For additional discussion of this topic, see the portion of these course materials entitled "Application of the Nevada Sales and Use Tax to Particular Businesses and Taxpayers."
f. Returned Merchandise. A customer is entitled to a refund of the sales tax paid on returned merchandise if the refund is given in cash or in credit. NRS 372.025(3)(b). The retailer can deduct from gross receipts the sales price of the returned merchandise, including the portion of the price designated as tax.
In addition, if a restocking fee is charged, the retailer may still deduct the full sales price from its gross receipts if the restocking charge represents a reasonable estimate of the retailers actual expense in restocking. NAC 372.090.
g. Containers Used In Shipping.
i. Furnished by Shipper. Any tangible personal property used by the shipper prior to the transfer of title is included in the gross receipts. NRS 372.025. This would include not only the container but all labels, wrapping material, boxes, etc. NRS 372.025. However, the cost of all containers and related material used in a sale which is exempt under NRS 372.335 is also exempt from the tax. NRS 372.335 exempts sales to a purchaser who reside out-of-state where the shipment is made by vendors' equipment via a common carrier, customs broker or forwarding agent.
There is also an exemption from sales and use taxes, the sale of a non-returnable container when sold without the contents to persons who place the contents in the container and sell the contents with the container; containers sold with the contents when the sales price is not required to be included in the measure of the tax and returnable containers when sold with the contents in connection with a retail sale of the contents or when resold for refilling. NRS 372.290.
ii. Movers, Carriers and storers of household goods. Under NAC 372.310 containers and other packing materials used by movers, carriers and storers of household goods used by the carrier in interstate movements are subject to a special rule. For a carrier based in Nevada the tax applies to:
1. 25% of all containers purchased by the carrier, or
2. If the carrier keeps track of all of his purchases which are not exempt under NRS 372.335, then only the containers used in intrastate moves would be subject to the tax.
h. Installation Labor. The cost of labor or services used in installing or applying the property sold are not included in the gross receipts when calculating the tax. NRS 372.025 and 372.065.
1. Introduction. The Nevada use tax is imposed on storage, use, or other consumption in Nevada on the sales price of tangible personal property purchased from any retailer for storage, use or consumption in Nevada. The highlighted terms "retailer" and "tangible personal property" have the same meaning given such terms under the sales tax.
a. The use tax provided for by NRS 372.185 imposes a compensating use tax on the privilege of storing, using or consuming tangible personal property in Nevada. The taxable event is use within Nevada. The rate of tax is 6.5% based on sales price of tangible personal property, the same as the state sales tax rate. The use tax is intended to complement the sales tax. State of Nevada Tax Commission v. Obexer & Sons, 99 Nev. 233, 660 P.2d 981 (1983). It is a tax designed to tax only those transactions in which a Nevada sales tax has not been paid. The object of the tax is to remove any incentive for a Nevadan to purchase property in a state having a lower tax than Nevada. Id. Until 1995 Nevada did not give a credit against the Nevada use tax on property which was subject to a sales or use tax in another state. Since 1995, the State of Nevada has allowed a credit against the use tax for sale or use taxes paid another state. This has been a somewhat informal policy until January of 1997 when it was formalized by the addition of NAC § 372.055.
All of the statutory exemptions set forth in NRS 372.260 through 372.340 are applicable to both the sales and use tax. The only separate exemption applicable to the use tax is that found in NRS 372.345 which exempts from the use tax, the storage, use or consumption of property the gross receipts from the sale of which were subject to Nevada sales tax. This provision insures that a single transaction is only taxed once.
b. Collection of tax. The sales tax is collected by retailer from purchaser at time of sale. NRS 372.110. However, the primary liability for the use tax is on the purchaser or user. NRS 372.190. A nonresident vendor with nexus to Nevada is required to collect Nevada use tax from its Nevada customers and deliver a receipt therefore to the Nevada resident. NRS 372.185 and 195. A nonresident vendor without nexus to Nevada is not required to collect Nevada use tax from its Nevada customers. Nevada purchasers are required to pay use tax and file use tax forms directly with the state. Resale certificates are equally applicable to the sales and use tax. NRS 372.160 and NRS 372.230.
2. Storage, Use or Consumption. The use tax provided for by NRS 372.185 imposes a compensating use tax on the privilege of storing, using or consuming tangible personal property in Nevada. The taxable event is use within Nevada. Like the sales tax presumption of NRS 372.155, it is presumed that any tangible personal property sold for delivery in Nevada is sold for use, storage or consumption in Nevada. The burden is on the person making the sale to prove otherwise, unless he takes a resale certificate. NRS 372.225. It is presumed that property shipped or brought to Nevada was purchased from a "retailer" for use, consumption, or storage in Nevada. NRS 372.250.
It is also presumed, that tangible personal property delivered outside of Nevada, to a purchaser known by the retailer to be a resident of Nevada is for use, storage or consumption in Nevada. However, this presumption can be controverted if the retailer obtains a statement in writing from the purchaser that the property was purchased for use outside Nevada. NRS 372.255.
a. Storage and Use. Storage is defined as the keeping or retaining in Nevada of tangible personal property purchased from a retailer unless: (1) the property is kept or retained for sale in the ordinary course of business, or (2) the property is intended for subsequent use solely outside the state of Nevada. NRS 372.075.
The definition of storage recognizes that the importation of property for subsequent resale, like the purchase of property in a Nevada in an otherwise taxable sale where resale by the purchaser is contemplated, is not subject to the use tax. Accordingly, the use tax recognizes that resale certificates may be given by a purchaser who purchases property out-of-state with the intention to resell. NRS 372.225. The consequences of taking a resale certificate given in a transaction subject to the use tax and the form and content of the certificate are identical to the corresponding provisions of the sales tax. NRS 372.230; NRS 372.335. see, discussion of the Sales Tax under Part B.2.b. of this section of the course materials.
In addition, the definition of storage under NRS 372.075 recognizes the limitations inherent on the State's ability to tax property in the stream of interstate commerce and only temporarily stored in Nevada. NRS 372.080 further elaborates on this limitation, and provides that the terms "storage" and "use" do not include keeping, retaining or exercising any right or power over the property (1) for subsequently transporting the property out-of-state for use solely outside the state of Nevada, or (2) of for the purpose of being processed, fabricated, or incorporated into other tangible personal property to be transported outside of Nevada.
b. Intent requirement. The use tax is only imposed on property actually used, consumed or stored in Nevada. In order for the tax to apply, there must be an intent at the time of the purchase to use, consume or store the property in Nevada. AGO 248 (10-16-1961). Nevada has little authority to guide a taxpayer on the intent requirement. Generally, courts look to where a particular asset was first used or how long the asset was outside of the state seeking to impose the use tax before being brought into the State. See, generally, Use Tax on Property Purchased by Nonresident in Another State, 41 ALR 2d 535.
3. "Purchase." The definition of purchase under NRS 372.045 for purposes of the Nevada use tax is substantially similar to the definition of a "sale" under the sales tax as set forth in NRS 372.060. However, the statute is not as specific as the corresponding sales tax provision in respect to leases and rentals.
The regulations are not quite clear on this point either, but it is accepted that since the sales and use tax are complementary, that a lease or rental which would be treated as a sale for sale tax purposes, if made in Nevada will be treated as a purchase if the lease or rental relates to property leased or rented outside of Nevada and then used or stored in Nevada.
4. Tangible Personal Property. See the discussion at part B.3 of this outline.
5. Sales Price. The definition of "sales price" contained in NRS 372.065 is virtually identical to the definition of "gross receipts" under NRS 372.025 for purposes of measuring the sales tax.
6. Collection of Tax.
a. In general. NRS 372.110 provides that insofar as is possible the retailer is to be collected from the purchaser at the time of purchase. However, it is the purchaser who is primarily liable for the tax, unless he has paid the tax to a retailer and obtained a receipt. NRS 372.190, NRS 372.195. If the retailer does collect the tax, then he is liable to the state. NRS 372.200. Note that under NAC 372.065 a person who acts as an agent for an unregistered retailer who delivers property in Nevada is responsible for collecting the sales tax from the purchaser upon delivery.
b. Registration of out-of-state Retailers. Nevada law requires out-of-state retailers who "maintain a place of business" in Nevada to collect and remit the use tax on sales to destinations in Nevada. NRS 372.195. An out-of-state retailer is considered to be "maintaining a place of business in the state" if it does any of the following:
(1) maintaining, occupying, or using an office, place of distribution, sales or sample room, warehouse, or any other place of business in Nevada;
(2) having any representative, agent, salesman, canvasser, or solicitor operating in Nevada under the authority of the retailer or its subsidiary to sell, deliver, or take orders for tangible personal property;
(3) deriving rentals from a lease of tangible personal property situated in Nevada;
(4) soliciting orders for tangible personal property through a system for shopping by means of telecommunication or television using toll-free telephone numbers, which is intended by the retailer to be broadcast by cable television, or other means of broadcasting to persons located in Nevada;
(5) soliciting orders for tangible personal property by means of advertising which is disseminated primarily to persons located in this state and only secondarily to bordering jurisdictions pursuant to a contract with a broadcaster or publisher located in Nevada;
(6) soliciting orders for tangible personal property by mail or electronic facsimile if the solicitations are substantial and recurring and if the retailer benefits from any activities occurring in Nevada related to banking, financing, collection of debts, telecommunication, or marketing, or benefits from the location in Nevada of authorized facilities for installation, servicing or repairs;
(7) being owned or controlled by the same person who owns or controls a retailer who maintains a place of business in the same or a similar line of business in Nevada;
(8) having a person operating under a retailer's trade name, pursuant to a franchise or license authorized by the retailer, if the person so operating is required to collect the tax pursuant to NRS 372.195 or 374.200; and
(9) soliciting orders for tangible personal property by means of advertising that is transmitted or distributed over a system of cable television in Nevada. NRS 372.728.
NRS 372.733 provides that broadcasters, printers, outdoor advertising firms, advertising distributors, and publishers that broadcast, publish, display, or distribute paid commercial advertising in Nevada which is intended to be disseminated primarily to persons located in Nevada and only secondarily to bordering jurisdictions are assumed to be agents of the person placing the advertisement. The statute specifically provides that the broadcaster, distributer, etc., is not liable for the tax and has no responsibility to file a return. The purpose of this provision appears to be to create a necessary nexus or presence in Nevada for the out-of-state retailer in order to support the imposition of the tax.
1. In General. Exemptions, exceptions and exclusions from the Nevada sales and use taxes arise in one of three forms: (i) explicitly under statute, (ii) as exceptions to the definition of a taxable sale or tangible personal property, or (iii) as exclusions from a taxable category of transactions. This portion of the outline contains a discussion of the specifically stated exemptions. To the extent that certain exemptions where previously addressed or are addressed in the latter part of these course materials, appropriate cross reference is made.
NRS Chapter 372 contains 20 operable exemptions from sales and use tax, but each numbered provision can exempt as many as four or five kinds of transactions or properties not taxed under certain circumstances.
a. Net Proceeds of Mines. NRS 372.270 exempts from the sales and use tax the gross receipts from the sale of and the storage, use or consumption in this state of the net proceeds of mines which are subject to the taxes levied pursuant to Chapter 362 of the NRS. The Attorney General of Nevada has construed NRS 372.270 to mean that the portion of the gross receipts from the sale of product which is subject to taxation under the net proceeds of mines tax described in Chapter 362 is exempt from the sales and use tax, but that portion of the gross receipts from the sale of product constituting the deductible costs of production is not exempt from the sales and use tax. AGO 76 (June 27, 1955). The Attorney General concluded that had the Legislature intended the entire sale of the mine product to be exempt, the Legislature would have simply stated that the gross receipts from the sale of the proceeds of mines is exempt. Instead, the Legislature specifically limited the exemption to those gross receipts from the sale of proceeds which are otherwise taxed.
b. Fuels, gas, electricity and water.
i. NRS 372.275 exempts from the sales and use tax the gross receipts from the sale or distribution or, the storage, use or consumption of motor fuels and gases of a kind used in an engine to power a motor vehicle on the highways of the State. The fuels covered by this section need not actually be used to power a vehicle on the highways, they only need be of a kind ordinarily and regularly used in internal combustion engines that propel motor vehicles and is used in an internal combustion engine. AGO 61 (5-16-1955); AGO 667 (5-22-1970.
ii. NRS 372.300 exempts from the sales and use tax the gross receipts from the sales, furnishing of services of, or the storage, use or consumption of water, electricity, and gas when delivered to consumers through mains, lines or pipes.
iii. NRS 372.300 exempts from the sales and use tax the gross receipts from the sales, furnishing of services of, or the storage, use or consumption of, wood, coal or petroleum or gas for domestic use. This exemption is restricted to fuels burned at residential locations to produce domestic heat and not to fuel burned to produce heat for commercial or industrial purposes. Sierra Pacific Power Company v. Department of Taxation, 96 Nev. 295, 607 P.2d 1147 (1980). The exemption does apply to fuel used in hotels or other public accommodations. AGO 71 (6-22-1955).
c. Constitutional Exemptions
i. Section 1 of Article 10 of the Nevada Constitution recognizes the limitations of Nevada to tax goods which are in interstate commerce. NRS 372.265 exempts from the sales and use tax the gross receipts from the sale of, or the storage, use or consumption of tangible personal property which the State of Nevada is prohibited from taxing under the Constitution or laws of the United States or under the constitution of Nevada. In addition, NRS 372.330 exempts certain sales to a common carrier when shipped via the purchasing common carrier out-of-state for use by the carrier our of state. In addition, NRS 372.335 exempts sales of property shipped outside Nevada. A complete discussion of these exemptions is contained in that portion of these course materials entitled "Nevada Sales and Use Tax in the Multi-state Context."
ii. Sales to the U.S. government and to the State of Nevada. NRS 372.235 exempts from the tax the gross receipts from the sale of property to the U.S. government, its instrumentalities, the State of Nevada, its unincorporated agencies and instrumentalities, and any city, county or political subdivision. State chartered credit unions are considered instrumentalities of the state. NAC 372.695.
d. Agricultural Exemption. NRS 372.280 exempts from the sales and use tax the gross receipts from the sale of, and the storage, use or consumption of: livestock ordinarily constituting food for human consumption; livestock feed; seed, fertilizer used for crops to be sold for human consumption retail; and registered poisons used for the production of crops to be sold at retail. Note that insecticides are not covered by this section. AGO 436 (9-15-1967). Under NAC 372.550, if insecticides or herbicides are mixed with a fertilizer in one product, the tax applies to the full sales price unless the proportions of insecticide, herbicide and fertilizer are shown on the package or bag in which case an allocation can be made as to the exempt portion.
e. Food. NRS 372.284 exempts from the sales and use tax the gross receipts from the sale of, or the storage, use or consumption of food for human consumption. Food does not include alcoholic beverages, tonics and vitamins, and prepared food intended for immediate consumption. The regulations define the types of outlets which are considered to be selling food for immediate consumption and therefore making sales which are not exempt from the tax. Included are vending machines, mobile vending stands, and caters. NAC 372.610. In addition, if an establishment sells both exempt foods and nonexempt foods and has eating facilities, then all food sales are presumed to be nonexempt unless the establishment inquired whether the customer intends to immediately consume the food and has received a negative response. id. However, the definition of prepared foods intended for immediate consumption does not include items which may be obtained with food stamps. NAC 372.615.
Administratively, the Tax Commission has exempted food served to patients in an institutional residence as part of a comprehensive service which includes the provision of basic necessities of life, food and shelter. NAC 372.610. In addition, NRS 372.286 exempts from the sales and use tax the gross receipts from the sale of, or the storage, use or consumption of food served to teachers and students by public and private schools, student organizations, and PTAs.
f. Mobile Homes. NRS 373.316 provides a partial exemption from the sales and use tax equal to 40% of the gross receipts from the sales and the storage, use or other consumption of new manufactured or new mobile homes. The gross receipts arising from the sale of used mobile homes and manufactured homes which were previously subject to payment of Nevada sales or use tax are exempt.
g. Aircraft and Major Aircraft Components of Nevada - based Airlines. Presently, NRS 372.317 exempts from tax sales of aircraft and major components to an air carrier holding a certificate issued pursuant to 49 U.S.C. §1371 and which is not solely engaged as a charter airline or a supplemental carrier as described in Title 49 of the U.S. Code. In order to qualify for this exemption, the air carrier must have its central office in Nevada and base a majority of its aircraft in Nevada. An air carrier wishing to qualify for this exemption must file an application with the Nevada Department of Taxation and obtain a certificate of exemption. NAC 372.715. If approved by the voters in 1996, this exemption would be revised to make exempt from sales and use tax aircraft and major components of a commercial air carrier engaged intrastate, interstate of foreign commerce.
h. Occasional Sale. NRS 372.320 discussed at B.2.d.
i. Containers. NRS 372.290 discussed at B.4.g.
j. Societal Segment Exemptions.
There are a series of exemptions which apply to specific segments of Nevada society. They include:
a. Newsprint and other tangible personal property which becomes an ingredient in or a component part of a newspaper regularly issued in average intervals not exceeding 1 week. NRS 372.315; NAC 372.630 - 372.670.
b. Certain prescription drugs, prostheses, and medicines. NRS 372.283.
c. Sales to religious, charitable or eleemosynary organizations in their religious, charitable or eleemosynary activities. NRS 372.325. For a fuller discussion of this topic, see the portion of these course materials entitled "Application of the Nevada Sales and Use Tax to Particular Businesses and Taxpayers."
d. In addition, the loan or other consumption to tangible personal property to the U.S., the state, counties, etc., or to a religious, charitable or eleemosynary organization is exempt from tax. NRS 372.327.
e. Sales of textbooks within the University of Nevada System to students are exempt. NRS 372.287; NAC 372.625,
2. Exemption Certificates. Nevada does not have a proscribed form of exemption certificate. However, the retailer does not have to collect the tax if the purchaser certifies in writing that the property will be used in manner exempt from the tax. If the purchaser violates the terms of the exemption by using the property in some manner other than for an exempt purpose, then the purchase is liable for the tax as if it were the retailer making a retail sale at the time of such use. NRS §372.350.
1. Deferrals.
NRS 372.397 provides for the interest free deferral of payment of the tax on the sale of capital goods for a sales price of $100,000 OR MORE. The period of deferral is determined by the value of the capital goods acquired. If the sales price is:
* At least $100,000 but less than $350,000, the tax must be paid within 12 months.
* At least $350,000 but less than $600,000, the tax must be paid within 24 months.
* At least $600,000 but less than $850,000, the tax must be paid within 36 months.
* At least $850,000 but less than $1,000,000, the tax must be paid within 48 months.
* One million dollars or more, the tax must be paid within 60 months.
In determining the amount of capital goods acquired, a person may aggregate all purchases (i) during a six month period if the total is less than $600,000 or (ii) during a twelve month period if the total is at $600,000 or more. NAC 372.040.
Deferral is allowed only for those capital goods included in the definition of "section 38 property" as set forth in Section 48 Internal Revenue Code in affect prior to its amendment by the Revenue Reconciliation Act of 1990. A requirement for deferral is that the capital goods must be of a nature that the use thereof will directly provide jobs in the state of Nevada. The following capital goods are not eligible for deferral:
* buildings or their structural components,
* equipment used principally for tourism or gaming related activities,
* equipment utilized by a public utility, and
* medical treatment equipment.
To obtain a deferral, a application must be submitted to the Commission on Economic Development. If the purchase is to be made outside Nevada the application has to be made in advance or, if the purchase has been made, within 60 days after the date on which the tax is due. If the purchase is made in Nevada the application must be made within 60 days after payment of the tax.
The Commission on Economic Development will approve an application for deferment if:
(a) The purchase is consistent with the commission's plan for industrial development and diversification; and
(b) The Commission determines that the deferment is a significant factor in the decision to locate or expand a business in this state.
If a petition for deferment is granted, the taxpayer must post security with the department in an amount equal to the deferred tax liability. NAC 372.827.
2. Abatement
The 1995 Nevada Legislature, effective July 1, 1995, added a new Section 374.357 to NRS Chapter 374 permitting the Commission on Economic Development to abate the taxes imposed by Chapter 374 to businesses which are establishing new, or expanding existing, Nevada facilities in respect to purchases of "eligible machinery and equipment." The legislative intent is to further industrial development in Nevada. This new section is similar in its requirements to NRS 372.397 but imposes additional requirements not contained in that section. Abatement of the tax otherwise payable in respect to the sale of capital goods is for a maximum period of two years.
Abatement is allowed only for machinery and equipment for which a deduction is allowed under Section 179 of the Internal Revenue Code. The following are not eligible for abatement:
* buildings or their structural components,
* equipment used in gaming,
* equipment utilized by a public utility,
* medical treatment equipment, or
* machinery or equipment used in mining.
To obtain an abatement, a application must be submitted to the Commission on Economic Development. The Commission on Economic Development will approve an application for deferment if:
(a) The purchase is consistent with the commission's plan for industrial development and diversification;
(b) The Commission determines that the abatement is a significant factor in the decision to locate or expand a business in this state;
(c) The average hourly rate paid by the business to its employees is equal to the statewide hourly rate;
(d) The business has health insurance available to workers and to their dependents;
(e) The business is or will be duly licensed by all applicable governmental authorities;
(f) The business will provide at least 10 full-time, permanent jobs by the fourth quarter that it is in operation;
(g) The applicant commits to maintaining the business in Nevada for at least five years.
The Commission is given the power to approve an application not meeting all of the above requirements "if warranted."
If the business does not stay in Nevada for the full five years, it must repay to the State the amount of the abatement with interest, "unless the Nevada Tax Commission determines that the business has substantially complied with the requirements . . ."
3. Economic Development Zone Credit.
NRS 374.643 permits certain qualified businesses which have received a valid certificate under the provisions of NRS 274.270 to file for a credit or refund for the amount of tax paid under Chapter 374 for all tangible personal property purchased in the conduct of its business. Under Chapter 274 of the NRS, certain economic development zones can be established in depressed and impoverished areas by State and local official action. A business which is located in one of these areas or which relocates to the area, and which make certain undertakings required by Chapter 274 qualifies for benefits including the credit provided by NRS 374.643. Any such qualified business must enter into an agreement with the local municipality. If relief under NRS 374.643 is part of this agreement, the agreement must state the period of time during
Every "seller" must file a sales tax return. NRS 372.360. The Department interprets the term "seller" to include manufacturers. Therefore, a taxpayer who sells at wholesale or retail must file returns. Similarly, a use tax return must be filed by (1) every retailer maintaining a place of business in Nevada, and (2) every person purchasing tangible personal property, the storage, use or other consumption of which is subject to use tax and who has not paid the use tax to a retailer. The returns are entitled "Form ST-18" for "sales/use tax" and "Form ST-19" for "use tax." (See samples of forms on following page). The forms incorporate all sales and use taxes levied by state, county and city jurisdictions.
A taxpayer must remit its sales and use taxes for each reporting period to the Department with the tax return for that period. NRS 372.375. The rate of tax is the rate imposed by the county in which the property is delivered. NRS 372.365. Therefore, if furniture is purchased in Carson City County for delivery in Douglas County the rate of tax is 6.5%. The rate imposed by Douglas County. Finally, taxpayers are allowed to withhold 1.25% of the taxes otherwise due as reimbursement for the taxpayer's costs of collecting the tax. NRS 372.370.
The time for filing a return varies depending upon the total taxable sales during a month. The reporting and payment period of a taxpayer whose taxable sales do not exceed $10,000 per month is a calendar quarter. NRS 372.380. In such a case, the return must be filed and the tax paid before the last day of the month next succeeding the end of the calendar quarter. All other taxpayers must file a return and pay the tax on a monthly basis, on or before the last day of the month next succeeding the month being reported. NRS 372.355. If the Department deems it necessary in order to insure the payment or to facilitate the payment of sales and use taxes, it can require returns and payment of the taxes for periods other than calendar months or quarters. NRS 372.380. Under any of the above reporting periods, if the last day of the month falls on a weekend or holiday, the following first working day is used as the due date. Taxpayers are required to file returns even if no tax is due; however, taxpayers who operate seasonal businesses may request to be placed on temporary cancellation during off months by either writing on the face of the return "final", the date of the closing and the approximate date of reopening, or by giving the same information on a card or letter to the Department. Taxpayers who fail to take advantage of this temporary cancellation must file a return for every period.
When a taxpayer goes out of business, he must notify the Department by marking the last return he files as a "final return." In order to receive a refund of the taxpayer's security deposit, the taxpayer should send a separate request for refund to the Department.
NAC 372.790 sets forth various rules concerning filing returns and paying sales and use taxes by mail. Pursuant to these rules:
(1) A report, return or remittance sent through the U.S. Mail is deemed to have been received on the date shown by the post office cancellation mark stamped upon the envelope containing it, or on the date it was mailed if sufficient proof establishes that the document or remittance was timely deposited in the United States mail, postage prepaid and properly addressed to the Commission.
(2) A receipt for material sent by certified or registered mail, if different than the post office cancellation mark, will prevail if the date on the receipt is earlier than the cancellation date.
(3) A record authenticated by the post office that the cancellation on certain batches of mail was erroneous is proof satisfactory to the Commission that the mailing was made on a date other than the post office cancellation date.
(4) If it is known that the postal service was inoperative due to acts of God or other reasons, the Commission will consider such circumstances in determining whether timely mailing was made.
(5) The Commission will not accept a cancellation affixed by a private postage meter or statements by the taxpayer or employees of the taxpayer to establish the date of mailing. Such statements will not be considered sufficient to refute the post office cancellation date as the date of mailing.
The taxpayer bears the burden of proving that the return was timely filed. A letter from the post office stating that a delay on its part may be responsible for any delay does not constitute sufficient proof. Under extraordinary circumstances, the taxpayer may apply for an extension of time for making the return or paying the tax for a period not to exceed one month. NRS 372.395. The definition of "good cause" is not specified in the statutes or regulations but is likely subject to the discretion of the Department of Taxation. However, this discretion may not be exercised if the tax has become delinquent. Attorney General Opinion 604 (7-31-69).
Nevada borders on five states. As a result, sellers and buyers are potentially subject to a variety of interstate issues. That the Nevada Department of Taxation is keenly aware of these issues and the potential for abuse that arises in the interstate context is evidenced by the fact that the Department has full-time auditors stationed in several states around the country . A total of four auditors are in California alone. Consequently, sellers and buyers should each establish accurate recording procedures and systems to identify:
1. The event giving rise to potential tax exposure.
2. Whether such event is taxable under either the sales or use tax provisions of Nevada or a neighboring state.
3. Whether such event, if taxable by a state, is taxed under such state's sales or use tax laws.
4. Which party or parties bear the legal and economic burdens of the tax.
5. Which party is responsible for payment and which party is responsible for collection and/or remittance of such tax.
6. Which state or states are entitled to receive such tax.
7. Whether there is entitlement to a credit for any previously paid sales or use tax.
The rules, strategies and tactics involved in planning interstate transactions can be complex. This is due in part to the variety of ways in which taxable transactions may occur. There are also ambiguities in the interpretation and enforcement of key provisions and concepts underlying the law, particularly those dealing with the time and place of the sale, the sales and use tax nexus requirements, and the use tax collection responsibilities. Further, some businesses have consciously chosen to conduct their daily operations on an informal basis with little effort to become or remain informed about sales and use tax compliance matters or to routinely assemble information necessary to apply the rules.
The risk of multiple taxation is practically eliminated in many instances in most states because such states both (1) exempt outward bound sales and interstate commerce from sales taxation, and (2) allow a purchaser a credit for any prior sales or use tax paid or collected to another state on an inbound sale. In 1995 the Nevada Department of Taxation, through the issuance of a confidential internal memorandum, reversed a long-standing policy against allowing such credits. This policy was formalized in January of 1997 by the issuance of NAC § 372.055 which provides as follows: "In determining the amount of use tax that is due from a taxpayer, the department will allow a credit toward the amount due to this state in an amount equal to sales tax legitimately paid for the same purchase of tangible personal property to a state or local government outside of Nevada, upon proof of payment deemed satisfactory to the department.
The effective administration of a compensating use tax requires a vendor collection system in which the non-resident vendor is liable for amounts it fails to collect from persons known to be residents of Nevada. However the state can only collect from non-resident vendors if it has jurisdiction over them by reason of their "nexus" with the state. Nexus refers to the connection, link or contacts between a state and a taxpayer. The Federal Constitution limits a state's authority and ability to enforce its tax laws against non-resident vendors.
Among the United States Constitutional provisions that limit a state's ability to tax, the Commerce and Due Process Clauses are the most frequently invoked to challenge sales and use tax laws. Pursuant to NRS § 372.265, the Nevada sales and use tax laws exempt sales which the state is unable to tax under the Federal and State Constitutions.
1. Commerce Clause Requirements.
The Commerce Clause reserves to Congress the power to regulate commerce among the states, with foreign nations, and with Indian tribes. It is well established that the clause also embodies a negative command forbidding the states to discriminate against interstate trade. Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U.S. , 114 S. Ct. 1345 (1994).
Pursuant to the U.S. Supreme Court's interpretation of the Commerce Clause in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), a state tax that impacts interstate commerce is nevertheless valid if it meets the following requirements:
1. It is applied to an activity with substantial connection (nexus) with the state;
2. It is fairly apportioned;
3. It does not discriminate against interstate commerce; and
4. It is fairly related to the services provided by the taxing state.
In addition to the above criteria, a state tax that impacts international commerce must do neither of the following to be valid: (1) Create a risk of multiple taxation, or (2) prevent the federal government from speaking "with one voice when regulating commercial relations with foreign governments." Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979).
2. Due Process Requirements.
The Due Process Clause prevents the states from depriving any person of life, liberty, or property without due process of law. The definition of "due process" has subsequently been determined by case law. For a state tax to be valid, there must be "some definite link, some minimum connection, between the state and the person, property or transactions it seeks to tax." Miller Brothers Company v. Maryland, 347 U.S. 340 (1954). In essence, the tax imposed must be reasonably related to the protection, opportunities, and benefits given by the state. See, Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978).
Related to the principle that a tax be reasonably related to the benefits provided by the taxing state, is the requirement that the tax be fairly apportioned. This fairness element is required by both the Commerce and Due Process Clauses and has two essential components. See, Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983). First, the tax must have "internal consistency". In other words, if the tax were imposed by every jurisdiction, would it result in an impermissible interference with free trade? Second, the tax must have "external consistency". This means that the factors used in calculating the tax must reflect a reasonable sense of how the income being taxed is generated. Basically, the external consistency component requires an analysis of whether the income being taxed is in proportion to the activity being conducted within the taxing state.
The internal consistency component has been used to invalidate tax statutes that on their face discriminated against interstate commerce. States may not impose greater burdens on out-of-state business enterprises than on equivalent local businesses. An example of this discrimination is a Louisiana use tax that was applied to oil service equipment, which had been manufactured outside the state. The cost on which the tax was based included labor and shop overhead whereas if equipment manufactured in Louisiana had been used, labor and overhead would have been excluded from the tax. See, Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64 (1963).
Exemptions offered to local businesses that are not available to out-of-state firms can also affect the constitutionality of a tax. In a Washington case, Tyler Pipe Industries, Inc. v. Department of Revenue, 483 U.S. 232 (1987), an exemption available only to in-state manufacturers who also engaged in wholesaling was deemed discriminatory in favoring local businesses.
3. Nexus Tests.
"Nexus" is a requirement for taxation of interstate transactions under both the Commerce and Due Process Clauses. Under the first prong of the Complete Auto Commerce Clause test, a tax is valid only if it is applied to an activity having a substantial nexus with the taxing state. Under the Due Process Clause, there must be some minimum connection ("minimum contacts") between a state and the person, property, or transaction that it seeks to tax. However, although the two tests are similarly phrased and the courts have previously treated them as a single test, the United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), confirmed that the Due Process Clause's minimum contacts requirement and the Commerce Clause's substantial nexus requirement are not identical.
In Quill, the Court ruled that the Commerce Clause, but not the Due Process Clause, barred North Dakota from requiring an out-of-state mail order company to collect and pay use tax on goods sold to North Dakota customers when the Company had no outlets, sales representatives, or other significant property in the state. In so ruling, the Supreme Court reaffirmed that portion of its landmark decision in National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967), that established under the Commerce Clause a "bright-line" rule that permits a state to compel out-of-state mail order sellers having a physical presence in the state to collect its use taxes, but not those who do no more than communicate with customers in the state by mail or common carrier or as part of a general interstate business.
However, the court overturned Bellas Hess and its prior decisions to the extent that they indicate that the Due Process Clause requires the sellers' physical presence in a state before the seller can be obligated to collect the state's use tax.
The distinction between the two nexus tests was grounded on the different constitutional concerns and policies that underlie the Due Process and Commerce Clauses. While due process primarily concerns the fundamental fairness of governmental activity, the Commerce Clause concerns the effects of state regulation on the national economy. The evolution of due process jurisprudence since Bellas Hess indicates that the focus of the minimum contacts test is whether a taxpayer has fair warning that its activity may subject it to a foreign sovereign's jurisdiction. In contrast, the substantial nexus test under the Commerce Clause is a means of limiting the state burdens on interstate commerce.
Thus, although the Quill taxpayer's continuous and widespread solicitation of business -- its "economic presence" -- within North Dakota was more than sufficient to satisfy the minimum contacts test of due process, this was not, in the absence of the taxpayer's physical presence in the state, sufficient to satisfy the substantial nexus test of the Commerce Clause. Yet, because Congress has the authority to regulate interstate commerce, it may modify the Quill rule by deciding whether, when and to what extent the states may burden out-of-state mail order companies with a duty to collect use taxes.
Because physical presence is required to subject a taxpayer to jurisdiction within the State of Nevada it is important to have an idea concerning what constitutes this "physical presence" in a state. Examples of physical presence include the following: a single resident employee in the state, the temporary storage of fuel to be withdrawn for consumption in interstate flights, the use of independent brokers within the state by an out-of-state seller to solicit sales in the state, etc. Note, however, that it is not required that the taxpayer's physical contacts with the state be related to the activity actually being taxed so long as the entity does in fact have a physical presence in the state.
A Nevada case dealing with the Commerce Clause was decided in 1985. See, Great American Airways v. Nevada State Tax Commission, 101 Nev. 422, 705 P.2d 654 (1985). In that case it was held that the Nevada use tax was properly assessed on an airplane purchased by a Nevada corporation outside the state and used inside and outside the state. The tax was held not to violate the Commerce Clause because the taxpayer had a substantial nexus with the state and the tax was fairly apportioned, non-discriminatory, and fairly related to services provided by Nevada to the taxpayer. The court's decision in Great American Airways is troublesome in that it creates a distinction between the taxation of charter airlines which operate out of Nevada and airlines which operate out of states other than Nevada.
1. Use Tax
Nevada is a free-port state. The basic provision of law in Nevada dealing with interstate transactions is Sec. 1, Cl. 4, Art. 10 of the Nevada Constitution which states as follows:
Personal property which is moving in interstate commerce through or over the territory of the State of Nevada, or which was consigned to a warehouse, public or private, within the State of Nevada from outside the State for storage in transit to a final destination outside the State ... shall be deemed to have acquired no situs in Nevada for purposes of taxation and shall be exempt from taxation. Such property shall not be deprived of such exemption because while in the warehouse the property is assembled, bound, joined, processed, disassembled, divided, cut, broken in bulk, relabeled, or repackaged.
In furtherance of this constitutional guidance, NRS § 372.080 exempts from the use tax (by excluding from the definitions of "storage" and "use") the following activities:
... the keeping, retaining or exercising any right or power over tangible personal property for the purpose of subsequently transporting it outside the state for use thereafter solely outside the state, or for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into, other tangible personal property to be transported outside the state and thereafter used solely outside the state.
There is also an exemption from the use tax for tangible personal property which was purchased outside Nevada and first used by the purchaser outside Nevada. The period of time the property must be used outside Nevada prior to bringing it into Nevada to avoid the use tax is not prescribed by statute or regulation, and so becomes a facts and circumstances determination. The ultimate issue is whether the property was purchased with the intent to use, store or consume it primarily in Nevada, coupled with the fact of its use, storage or consumption in Nevada. The Department does not adhere strictly to the California regulation establishing a 90 day period of use outside the state after purchase as the test.
2. Sales Tax
a. In General
NRS § 372.335 provides that gross receipts from any sale of property shipped pursuant to a contract of sale for delivery by the vendor to a point outside Nevada by means of (1) facilities operated by the vendor (e.g., the vendor's delivery trucks); (2) delivery to a carrier for shipment to a consignee; or (3) delivery to a customs broker or forwarding agent, are excluded from the computation of the sales and use tax. For this exemption to apply, title and possession must transfer to the purchaser at the out-of-state point of delivery.
Pursuant to NAC § 372.712, the Department will accept the following types of documentation as proof of delivery of merchandise out-of-state:
1. For companies making regular (that is, daily, weekly, biweekly, or monthly) deliveries out of state, sales invoices showing the address to which the merchandise was shipped.
2. A notarized affidavit signed by the purchaser taken at the time of delivery, if the notary is not a Nevada notary.
3. A truck log establishing the trip into another state that corresponds to the dated sales invoice.
4. Invoices from out of state for costs related to deliveries, including, but not limited to, meals, lodging and fuel that correspond to the date and place of delivery. Invoices for fuel must indicate the license number of the vehicle used for delivery.
5. Tax charged by another state and remitted to that state.
6. Purchase orders showing how and where the merchandise is to be delivered out of state.
In September 1996 this provision was amended to further provide that a special movement permit issued to the dealer by the department of motor vehicles and public safety to the dealer was evidence of an out-of-state sale. However, this provision was further amended to eliminate this provision effective July 1, 1997. Yet, in light of the recent passage of legislation expressly recognizing an exemption from the sales tax for motor vehicles sold to non-residents (as discussed further below), as a practical matter such a permit is still probably good evidence of an out-of-state sale.
When an out-of-state customer takes possession of purchased merchandise (other than motor vehicles) in Nevada, the sales tax applies. If, however, the vendor ships the merchandise to the customer via common carrier or the seller's own delivery trucks, the sale is an out-of-state sale and not subject to tax.
If a delivery of tangible personal property is made by an owner, a former owner, a factor, or their agents to a consumer or to a person for redelivery to a consumer pursuant to a sale made by a retailer not engaged in business in Nevada, such delivery is a retail sale by the person making the delivery rather than the foreign retailer. NRS § 372.050. For example, if a retailer located in Nevada delivers, as an agent acting for an unregistered out-of-state retailer, tangible personal property in the state, the Nevada retailer must collect the sales tax or take a resale certificate from the person to whom delivery is made. NAC § 372.065.
b. Aircraft and Motor Vehicles
Until recently, the movement of both aircraft and motor vehicles for the purpose of their sale or use outside Nevada was exempt from sales and use tax. See former NAC §§ 372.705 and 372.710 (repealed in January of 1997). The good news, however, is that in response to the repeal of NAC § 372.710 (regarding motor vehicles) the Nevada Legislature restored the exception for motor vehicles by statute. Because no similar action was taken to restore the exception for aircraft, that exception appears to be dead. Though it is not clear, it seems very likely that the standards which were formerly applicable to the motor vehicle exemption will once again apply under the new statute.
Eligibility for the exemption has traditionally been established when (1) a non-resident purchaser informs the retailer that the vehicle is to be removed from the state for registration, storage, use and consumption in another state within 15 days after delivery; (2) the retailer obtains a "special movement permit" from the Department of Motor Vehicles and Public Safety; and (3) the purchaser completes and submits an affidavit of purchase in the form prescribed by the Department of Taxation. NAC § 372.065.
Note that this procedure is an exception to the general rule of NRS § 372.335 and NAC § 372.712 that to be exempt from sales tax, title and possession must transfer to the purchaser at the out-of-state point of delivery. The motor vehicle exemption applies even though delivery to the out-of-state resident is made in Nevada.
This "exemption" is not available to residents of Nevada, even if the purchaser can claim another residence in another state. Campbell v. State, Dep't of Taxation, 109 Nev. 512, 518 853 P. 2d 717 (1993). Instead, a resident of Nevada that wishes to avoid Nevada sales tax must take delivery outside of Nevada and execute a statement indicating that the property was not purchased for storage, use or consumption in Nevada. NRS § 372.255.
There is a recurring enforcement problem concerning the purchase of motor vehicles by Nevada residents in a state that has no sales or use tax, or a smaller tax, and the subsequent registration of that vehicle by the person in that other state, who then brings the vehicle to his residence in Nevada for use in this state. Nevada residents caught engaging in this activity are subject to a 300 percent fraud penalty. NRS § 372.450(1). Despite the size of the penalty and the fact that the Department has made detection of this activity a priority, this problem continues.
The general rule is that sales, storage and use of airplanes within the State of Nevada are subject to Nevada sales and use taxes. However, the sale of aircraft and major components of aircraft, such as engines and other components made for use only in an aircraft, to an air carrier which holds a certificate to engage in air transportation issued pursuant to 49 U.S.C. § 1371 (redesignated as 49 U.S.C. § 41101, et seq.) and maintains its central office in Nevada and bases a majority of its aircraft in Nevada, is exempt from sales and use tax. NRS § 372.317. This exemption was apparently enacted to reverse the rule stated in Great American Airways v. Nevada State Tax Commission, 101 Nev. 422, 705 P.2d 654 (1985), that the Nevada use tax may be assessed on an airplane purchased by a Nevada corporation outside the state and used inside and outside the state.
Sales of computer hardware are subject to Nevada sales and use taxes. The treatment of computer software depends upon whether it constitutes a "custom program" or a "standard prewritten program." For this purpose, "software" means programs, procedures, rules, and any associated documentation pertaining to the operation of a computer system.
"Standard prewritten programs" are considered tangible personal property and, therefore, are subject to Nevada sales and use taxes. A standard prewritten program (sometimes referred to as "canned" or "off-the-shelf"), is software which is not originally developed and produced for the user.
With respect to a "custom program," the sales and use tax provisions do not apply because the preparation of such programs is considered to constitute the rendering of a professional service. In addition, the modification of a standard prewritten program is exempt from the sales and use taxes if such charges are separately stated. A "custom program" means software which is:
(i) developed pursuant to the special order of a customer;
(ii) produced by a provider exclusively for a specific user; and
(iii) of an original, one-of-a-kind nature.
The term also includes "pre-existing routines" or "prewritten components of a program" created specifically to be integrated into a larger custom program. "Pre-existing routines" and "prewritten components of a program" are those portions of a custom program which cannot function separately as "stand-alone" software.
The applicability of the Nevada sales and use tax laws to a manufacturer raises unique issues. A manufacturer may be both a purchaser and a seller of tangible personal property.
1. Tangible Personal Property Sold by a Manufacturer. As previously discussed, a retail sale is "a sale for any purpose other than resale in the regular course of business of tangible personal property." Accordingly, the manufacturer must collect the sales tax if it makes a retail sale of tangible personal property other than for resale. The manufacturer must receive a resale certificate to confirm that the sale is not subject to the sales tax.
2. Tangible Personal Property Purchased by the Manufacturer. Although the Nevada Statutes do not address the tax treatment of materials which are incorporated into a manufactured product, Section 372.370 of the Nevada Administrative Code provides helpful guidance. Such regulation provides, in part, that if tangible personal property is purchased for the purpose of incorporating it into the manufactured article to be sold, then the purchase of such property is exempt from sales or use taxes. An example is raw material which becomes part of the manufactured article. However, if the tangible personal property is purchased for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the article to be sold, then the sale is subject to tax. An example is a chemical used as a catalyst or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.
3. Repair Versus Manufacturing. The term "producing," "fabricating" and "processing" includes any operation which results in the creation or production of tangible personal property or which is the step in a process or series of operations resulting in the creation or production of tangible personal property. However, such terms do not include any operation which constitutes merely the repair or reconditioning of tangible personal property to refit it for the use for which it was originally produced.
With respect to repairmen, if the cost of materials and parts furnished in connection with repair work is substantial in relation to the total charge, the repairmen are treated as retailers and as such must collect the sales tax. On the other hand, if the cost of the parts and materials furnished in connection with the repair work is insubstantial in relation to the total charge, the repairmen are considered consumers and must then pay tax on the purchase of the parts and materials; consequently the repairman's invoice would not be subject to tax.
If property is sold on credit, either under a conditional sales or lease contract, the entire amount of the contract is taxable unless the retailer keeps adequate and complete records to show separately the sales price of the property, and the insurance, interest, finance, carrying and other charges. If such records are kept by the retailer, the insurance, interest, finance and carrying charges may be excluded from the computation of the tax.
A financing lease transaction is treated as a sale subject to Nevada sales tax. The lease transaction will be considered a sale if the term of the lease equals or exceeds the remaining economic life of the property, or the lessee has the option to purchase the property with no additional consideration or with the payment of nominal consideration. The economic life of the property is determined by reference to the facts and circumstances at the time of the transaction.
A person who purchases property within the state of Nevada for lease or rental within the state may either pay the sales tax on the purchase or give a resale certificate and elect to pay the tax on the gross lease or rental charges of the property. In the event the property is sold instead of leased or rented, the tax applies to the sales price. On the other hand, if the tax was paid on the sale, no further tax is due and tax is not collected from the customer on the gross lease or rental charges. A person who initially elects to pay the use tax on the basis of gross rental charges may later elect to pay the tax measured by the cost of the property, with no credit or refund allowed for any taxes paid before such election.
1. In General
A contractor is considered the consumer of property purchased for use in improving real property pursuant to a construction contract and the sales or use tax applies to the total sales price of the property purchased by the contractor. Property purchased by the contractor for use in the performance of a construction contract for improvement to real property is deemed to have been purchased for use in improving the real property. The provisions applicable to repairmen previously discussed are inapplicable to construction contractors for improvement to real property. Query whether the use tax is the liability of the contractor or the owner of the property in the event the contractor fails to pay the tax.
A "construction contractor" is any person who acts solely in a professional capacity or through others to construct, alter, repair, add to, remodel or otherwise improve any real property. The term also includes a subcontractor and an interior decorator, but does not include any employee who receives wages as sole compensation, a licensed architect, or a registered professional engineer. Excluded from the definition of a construction contractor is a business that manufactures modular homes, sectionalized housing, prefabricated homes or any other factory-built home or unit "who joins, installs or affixes" the prefabricated home or unit to real property. Due to the results of recent litigation in this area, this regulation was amended to treat manufacturers of prefabricated buildings as construction contractors to the extent they are providing the units under a contract with a governmental entity. See, Scotsman Manufacturing Co. v. State, Dep't of Taxation, 107 Nev. 127, 808 P.2d 517 (1991), cert. den., 112 S. Ct. 1184 (1992).
A "construction contract for improvement to real property" includes a contract for erecting, constructing or fixing a structure, other improvement on or to real property, or remodelling, altering, or adding to or repairing of an improvement to real property. The contract may be formal or informal.
One of the common difficulties in this area is distinguishing between contracts to improve realty and retail sales contracts. Many businesses tend to confuse the two, and treat a contract to improve realty as a retail sales contract, or vice versa. The area of most uncertainty is that of contracts to furnish and install such things as window blinds, signs, cabinets, and other types of fixtures that will not lose their individual identity but which are definitely attached to realty. At one time the Department attempted to follow California's lead in this area by specifying that contracts to furnish and install fixtures were sales of tangible personal property, with any charge for installation being exempt under NRS § 372.035(3)(c). This approach was abandoned in favor of the current regulations, which do not really answer the question of whether such contracts are construction contracts or retail sales contracts.
The common law test as to what is a fixture and thus an improvement to realty requires an analysis of (1) whether the property is annexed to the realty (is actually or constructively joined to the real property), (2) whether the property is adapted to the use being made of the property, and (3) the intent of the parties at the time the items are installed. Fondren v. K/L Complex, Ltd., 106 Nev. 705, 710, 800 P. 2d 719 (1990). Trade fixtures are considered to be personal property. Id. Accordingly, a contract to furnish and install an item of tangible personal property that will become a fixture to the realty is a contract to improve real property, with the contractor liable for sales or use tax on his cost of purchasing the materials to be installed. A contract to furnish and install a trade fixture is a retail sale of tangible personal property.
The problem with this approach is that it amounts to a facts and circumstances analysis of each contract, which makes the correct application of the law difficult to administer and difficult to comply with by businesses.
A further problem area in this regard has apparently been in the area of appliances. However, much of the confusion in this regard has now been resolved by the Nevada Legislature through the recent passage of legislation designed to provide instruction on the application of the sales and use tax statutes to the retail sale of large appliances (including, but not limited to, washers, dryers, ranges, stoves, ovens, dishwashers, refrigerators, freezers, ice makers and hot water dispensers). If the large appliance is sold separately or with installation or replacement services or any combination thereof, the sales tax must be applied to the retail sales price of the large appliance to the customer. The sales tax does not apply to charges for or associated with the installation and replacement if those charges are stated separately on the sales receipt or in the contract of sale.
If the large appliance is sold as a constituent part of a contract for the construction or refurbishment of an improvement to real property or a mobile home, the sales tax must be paid by the contractor on the sales price of the large appliance to the contractor. "Contract for the construction or refurbishment of an improvement to real property" means a contract for erecting, constructing or affixing a structure or other improvement to real property or a mobile home, including the remodeling, altering or repairing of an improvement to real property or a mobile home. The term does not include the sale, delivery, installation or replacement of one or more large appliances not included in a contract for erecting, constructing or affixing a structure or other improvement to real property or a mobile home.
2. Government Contractor Issues
This is an area related to the previous topic, and one that has seen more than its share of litigation in Nevada with respect to application of the sales and use tax. NRS § 372.325(1)-(4) sets forth an exemption from the payment of sales tax on sales of tangible personal property to federal, state and local government entities. Governmental entities often contract with private businesses to provide equipment or machinery, or to construct improvements onto government owned land or buildings. Since the retail sale of tangible personal property to a governmental entity is exempt from sales tax, the foregoing analysis of what is a retail sale to the government and what is a contract to improve realty becomes especially significant for tax purposes.
Insofar as the federal government is concerned, there have been several cases reported out of the Nevada Supreme Court that have wrestled with this topic. Unfortunately, the court has muddled things up in its decisions. In the case Scotsman Manufacturing, Inc. v. State, Dep't of Taxation, 107 Nev. 127, 808 P.2d 517 (1991), cert. den. 112 S. Ct. 1184 (1992), the court considered a contract between Scotsman and REECo (a prime contractor under contract with the U.S. Dep't of Energy) in which Scotsman, a manufacturer of modular buildings, contracted to furnish and install modular housing units at the Nevada Test Sit. Although the contract was actually a construction contract, as Scotsman was the manufacturer of the modular units at issue, Scotsman was considered a retailer of the modular units under NAC 372.190(1)(c)(4). The court engaged in an analysis of federal case law on when a state sales or use tax falls on the federal government such that the tax is violative of the Supremacy Clause of the United States Constitution. In it conclusion the court decided that the analysis is different for a sales tax case than it is for a use tax case. Id. at 133-4. In a sales tax case, the court concluded that the legal incidence of the tax falls on the purchaser. Id. at 131. If that purchaser is a private contractor under contract with the federal government, then the sales tax is appropriate. Id. However, if the purchaser is the federal government, then the sales tax is barred by the Supremacy Clause (as well as by NRS § 372.325(1)). Id.
In the case of a use tax the analysis is different. Where a contractor purchases tangible personal property for use in completing its contract with the federal government, the contractor's use of the property is subject to the use tax unless the contractor is a "constituent part" of the federal government. Id. at 132. This is so even if the property used by the contractor is acquired using government funds and under a contract calling for title to the property to pass immediately upon purchase from the vendor to the government. Id. The legislature has codified this principle in NRS 372.340.
The court relied on the analysis in Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954) for the test on when a sale was to the federal government. That test looks at four factors; (1) did the contractor identify itself to the vendor as a federal procurement agent, (2) did title pass directly from the vendor to the government, (3) did the purchase order to the vendor state that the government was actually making the purchase and that the government would be liable for the purchase price, and (4) is the contractor liable to the vendor for the purchase price. Scotsman, 107 Nev. at 131 citing Kern-Limerick, 347 U.S. at 119-122. The court ultimately concluded that the sale in this case was to the federal government, not to REECo., and so barred the application of the sales tax to the contract between Scotsman and REECo. It came to this conclusion without any analysis of the contract whatsoever, and appeared to rule on the "possibility" that this might have been a sale to the federal government. Id. at 134.
This topic was revisited by the court in State Dep't of Taxation v. Kelly-Ryan, Inc., 110 Nev. 276, 871 P. 2d 331 (1994). That case involved another contract to furnish and install modular housing units onto the Nevada Test Sit. The major difference between the facts in Kelly-Ryan and the facts in Scotsman was that in Kelly-Ryan the taxpayer was not the manufacturer of those units, e.g. they were purchased by the taxpayer from the manufacturer for installation at the Test Site pursuant to a construction contract with REECo. This important "fact" turned the case (in the court's opinion) into a use tax case, not a sales tax case. Kelly-Ryan was held liable for the use tax measured by its cost in purchasing the modular units since it was not a "constituent part" of the federal government.
As a result of these two cases the law on the application of the sales and use tax to federal contractors remains rather muddled in Nevada. The court has yet to share with the world an examination of an actual contract for the retail sale of tangible personal property under the Kern-Limerick analysis it adopted in Scotsman. Instead, the court has contented itself with a summary conclusion of what kind of contract it is. The Department does not necessarily agree with the court's belief that there is a different test for a sales tax case and a use tax case, since the ultimate test applied by the United States Supreme Court is to determine where the legal incidence of the tax falls. United States v. New Mexico, 455 U.S. 720, 733 (1982). The Department also does not agree that under the contact at issue in Scotsman there was a sale of tangible personal property directly to the federal government under an application of the Kern-Limerick analysis. However, the Department will utilize the analysis in Kern-Limerick in the future in determining whether a contract for the retail sale of tangible personal property to a government contractor is subject to sales tax.
The sales and use taxes do not apply to personal property sold, loaned, or donated to an organization created for religious, charitable or eleemosynary purposes, provided that no part of the net earnings of any such organization inures to the benefit of any private shareholder or individual. The organization desiring to be exempt from tax must file an application or an exemption certificate from the department. The certificate is valid for five years after issuance and is nontransferable. In the event the department denies the application, the organization may petition to the tax commission for reconsideration. An attempt was made to expand the exemption to sales "by" these delineated organization but that measure was defeated.
Because the taxing scheme is applicable only to sales or use of tangible personal property, no tax arises on the performance of services. Accordingly, services performed by attorneys, artists, writers, and accountants are not subject to sales and use taxes. However, when services are rendered to fabricate or become part of tangible personal property, such services are considered taxable sales. Query whether membership or club dues, admission fees, and similar entertainment charges are subject to sales tax and use taxes. Although there are no statutory or regulatory authorities which provide guidance, such charges do not normally involve tangible personal property and, therefore, should not result in the imposition of sales or use taxes.
Sales and use taxes are not imposed on the sale or use of the following property:
1. Food for human consumption which does not include alcoholic beverages, pet food, tonics and vitamins, and prepared food intended for immediate consumption.
2. Prosthetic devices for human use.
3. Certain medicines.
4. Textbooks sold within the University of Nevada system.
5. Meals and food products sold to students or teachers of a school.
6. Certain utility services.
7. Ingredient or component parts of newspaper regularly issued at average intervals not exceeding one week and any such newspaper.
8. Occasional sales of property.
9. Differences among the sales and use tax regimes. (e.g., sales and use tax exemption on capital equipment purchases inapplicable to Chapter 372).
Perhaps the most perplexing sales tax exemption to apply is the food exemption. This exemption was added to the sales tax law in 1979 and approved by a special vote of the people. The statutory language establishing the exemption is deceivingly simple:
(1) There are exempted from the taxes imposed by this chapter the gross receipts from sales and the storage, use or other consumption of food for human consumption.
(2) "Food for human consumption" does not include:
(a) Alcoholic beverages.
(b) Pet foods.
(c) Tonics and vitamins.
(d) Prepared food intended for immediate consumption.
It is the latter exception to the exemption, "prepared food intended for immediate consumption", that creates most of the problems of application. The legislature realized that this exception to the exemption may pose a bit of a problem in application, so they included in the bill a statement of legislative intent to give the Department some guidance in the administration of the exemption.
It is the intent of the legislature that the exemption of food for human consumption from the sales and use tax and local school support tax, if it becomes effective, be strictly construed and be applied only to those foods and beverages commonly purchased for preparation and consumption at home. As of the effective date of this section, such foods and beverages are those eligible for purchase with food coupons issued by the Department of Agriculture and sold in food stores or departments where sales of eligible foods and beverages constitute more than half of total sales. The exemption is not intended to include sales by or from catering services or vending machines.
See Act of May 4, 1979, Ch. 286, §156(2), 1979 Nev. Stat. 432.
One will note in comparing the statement of legislative intent with the statutory language of the exemption that one has very little in common with the other. Nevertheless, the Department valiantly adopted regulations in an attempt to carry out the statement of legislative intent with respect to this exemption. After holding numerous public hearings and taking testimony from the food industry, the Department amended the existing regulations and also adopted new language. The new regulations become effective on July 1, 1996.
The statement of legislative intent cited above, and the Department's existing regulations, tend to focus on where the food is sold, and not so much on the state of the food's preparation. The new regulations focus on the amount of preparation the food has under gone as well as where it is sold. Of course, there are many foods which are sold for immediate consumption that are inherently prepared, such as piece of fruit, or food which is packaged such that it has an indefinite shelf life of many days or months, such as a can of soda. Depending on the place where the food is sold, the quantity in which it is sold, and the degree of preparation, such foods are either taxable or exempt. A can of soda sold in a supermarket is exempt, since food stores are considered sellers of "food for human consumption." The same can of soda sold in a restaurant or a vending machine is taxable because it is sold at a place that sells "prepared food intended for immediate consumption." See Collins Discount Liquors & Vending v. State, Dep't of Taxation, 106 Nev. 766, 802 P.2d 4 (1990). In Collins the court determined that sales of chilled canned soda through a vending machine are subject to the sales tax. The court reached this conclusion by noting that food sold through vending machines are commonly intended for immediate consumption, and the soda is chilled by the machine, a form of preparation by the seller. However, many people purchase an individual can of soda from a supermarket or mini-market which they intend to immediately consume, yet the regulations state that such sales are exempt.
It is hoped that the new regulations will introduce a little more logic into the application of the exemption, by focusing more on the amount of preparation to the food that is done by the seller to make the food capable of immediate consumption upon purchase. This change was made to reduce the obvious inequity of a supermarket with a deli department selling exempt food that is immediately consumed, while a restaurant delicatessen must charge tax. Despite a spirited attempt by the vending machine industry in the 1995 Legislative Session, vending machine sales of individual quantities of food will remain taxable. Time will tell if the new regulations result in easier administration of this exemption and a reduction in disputes about food.
1. Organizational Structure Of Department Of Taxation.
The Department of Taxation is primarily responsible for the administration of sales and use tax (as composed of the taxes imposed in Chapters 372, 374, 377 and 377A), the net proceeds of mine tax (Chapter 362), the business tax (Chapter 364A), state and county fuel taxes (Chapters 365, 373), the liquor excise tax (Chapter 369), the cigarette excise tax (Chapter 370), the taxes on estates (Chapter 375A) and generation skipping tax (Chapter 375B). The Department also has responsibility for assessing and collecting property taxes on certain types of property, such as property used in an interstate or intercounty businesses (e.g. airlines, railroads, pipeline companies). While intracounty (local) property taxes are the primary responsibility of the county government to assess and collect, the Department has the responsibility to oversee the activities of the county assessors and to establish guidelines for them to follow in assessing property.
The Department staff supports the activities of the State Board of Equalization in its role of hearing property tax appeals. The Department also is charged with the responsibility of collecting insurance premiums tax (Chapter 680B), although the Division of Insurance retains the responsibility of administering the laws governing insurance companies operating in Nevada.
(See Table 1 on following page).
Department of Taxation
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DEPARTMENT OF TAXATION ADMINISTRATION
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BOARDS AND COMMISSIONS
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Table 1
The other major types of taxes collected in Nevada are the gaming taxes, administered by the State Gaming Control Board, the vehicle special fuel taxes and privilege taxes which are administered by the Department of Motor Vehicles, and room taxes collected at the local government level.
The Department is made up of the executive and four other divisions. The Audit and Revenue Divisions are directly responsible for the administration and enforcement of the sales and use taxes. The Audit Division assures compliance with the provisions of the Nevada sales and use tax act. In addition, the Audit Division assures the compliance laws relating to and including, but not limited to, business tax, net proceeds of mines tax, motor fuel, cigarette and other tobacco products and liquor tax.
The Revenue Division is responsible for the administration and collection of all sales and use taxes. Additionally, the Revenue Division handles various other taxes, including but not limited to the business license fee and tax, insurance premium tax, cigarette tax, other tobacco tax, liquor tax, motor fuel and jet fuel taxes, tire tax, estate tax and controlled substance tax. This division also issues permits, processes all tax returns, answers questions of taxability, conducts hearings and monitors accounts for compliance with statutes and reporting requirements. In addition, the Revenue Division provides interpretive guidance to the public regarding the sales and use taxes. Taxpayers should request the interpretive guidance in writing, although the Department frequently provides verbal guidance over the telephone. NRS 360.293, the Taxpayer Bill of Rights, provides that the Department must respond to requests for information within 30 days. NRS 360.2905 to 360.294. The revenue produced by the taxes administered by the Department is shown on Table 2.
(See Table 2 on following page).
| REVENUES: | 1992 - 1993 |
INCREASE (DECREASE) |
PERCENTCHANGE |
|
| Sales and Use Tax | $ 311,307,558 | $ 356,563,616 | 45,256,058 | 14.54 |
| Local School Support Tax | 346,291,987 | 397,566,906 | 51,274,919 | 14.81 |
| City/County Relief Tax | 348,487,405 | 398.487,315 | 49,999,910 | 14.35 |
| Local Option Taxes | 65,798,970 | 77,110,569 | 11,311,599 | 17.19 |
| Motor Vehicle Fuel Taxes | 191,850,205 | 214,203,139 | 22,352,934 | 11.65 |
| Jet Fuel | 7,068,236 | 7,261,055 | 192,819 | 2.73 |
| Petroleum Products Cleanup Fee | 7,518,469 | 6,990,950 | -527,519 | -7.02 |
| Intoxicating Beverage Taxes | 14,616,857 | 15,253,755 | 636,898 | 4.36 |
| Cigarette Tax | 46,349,496 | 46,491,069 | 141,573 | .03 |
| Other Tobacco Products | 2,357,121 | 2,527,087 | 169,966 | 7.21 |
| Special Drug Manufacturing Tax | 11,776 | 12,709 | 933 | |
| Estate Tax | 18,179,906 | 22,479,208 | 4,299,302 | 23.65 |
| Lodging Tax | 5,067,475 | 5,780,241 | 712,766 | 12.07 |
| Controlled Substance Tax | 62,944 | 45,836 | -17,108 | -27.18 |
| Net Proceeds of Mineral Tax | 37,048,529 | 39,173,421 | 2,124,892 | 5.74 |
| Centrally Assessed Property Tax | 46,283,195 | 50,826,760 | 4,543,565 | 9.82 |
| Business Tax and Fees | 49,674,496 | 54,861,349 | 5,186,853 | 10.44 |
| Insurance Premium Tax | -0- | 77,368,184 | 77,368,184 | 100.00 |
| Tire Tax | -0- | 951,000 | 951,008 | 100.00 |
| TOTAL: | $1,497,974,625 | $1,773,954,177 | $275,979,552 | 18.42 |
| DISTRIBUTIONS: | ||||
| State General Fund | $ 432,814,949 | $ 565,651,476 | $ 132,836,527 | 30.69 |
| State Highway Fund | 110,690,615 | 121,480,741 | 10,790,126 | 9.75 |
| DISTRIBUTIONS: | ||||
| State Distributive School Fund | $ 27,865,375 | $ 32,231,684 | $ 4,366,309 | 15.67 |
| Local Governments | $ 886,459,132 | 1,015,099,037 | 128,639,905 | 14.51 |
| Other Distributions | 13,079,322 | -5,374,555 | -29.12 | |
| Estate Tax Reserve, Endowment & Trust Funds | 18,138,766 | 22,418,672 | 4,279,906 | 23.60 |
| State Debt Service Fund | 3,551,911 | 3,993,245 | 441,334 | 12.43 |
| TOTAL: | $1,497,974,625 | $1,773,954,177 | $275,979,552 | 18.42 |
Table 2
The Nevada Tax Commission is the head of the Department of Taxation. The Commission consists of eight (8) members who are appointed by the Governor. Five of the members must have at least ten years of experience in the following fields: (NRS 360.020).
(i) real property;
(ii) utility business;
(iii) agriculture and livestock business;
(iv) finance; and
(v) mining.
The remaining Commissioners must be versed in other areas of property taxation and must be sufficiently experienced in business generally to be able to bring knowledge and sound judgment to the deliberations of the Commission. Each member receives a nominal salary for each day actually employed on the work of the Commission plus expenses. NRS 360.050. The Commission sets policies and prescribes regulations and may review all decisions made by the Department. NRS 360.245.
2. Enforcement Through Licensing.
As previously discussed, the sales tax is imposed upon retailers for the privilege of selling certain tangible personal property at retail within the State of Nevada. Every person must obtain a seller's permit before commencing business. The form used for applying for a seller's permit is Form 1:
Form 1
As a condition of obtaining the seller's permit, the applicant must deposit security with the Department. NRS 372.510. The amount of the deposit may not exceed two times the estimated average tax due quarterly, or three times the estimated average tax due monthly if monthly returns are filed, but not less than $100.00. However, for persons who are habitually delinquent in payment the limits are increased to three times and five times, respectively. The Department will accept the following forms of security:
(i) cash;
(ii) time certificates or certificates of deposits;
(iii) passbook savings accounts;
(iv) surety bonds executed by an insurance company;
(v) bearer bonds of the United States except savings bonds; and
(vi) liens upon real property created by a recorded instrument vesting the lien in the State of Nevada.
See NAC 372.825.
The Department may sell the security if it becomes necessary to recover any amount owing, including interest or penalties. The sale is generally conducted at public auction. See NRS 372.510.
A person who engages in business without a license, or who continues to engage in business after his license has been suspended, is guilty of a misdemeanor. See NRS 360.490. The license may be revoked if the person fails to comply with the sales tax provisions after a hearing requiring the person to show cause why the license should not be revoked. The license may be reinstated only if the Department is satisfied that the person will comply with the sales tax provisions.
If the person continues to engage in business without a license after notice from the Department, or after the license has been suspended or revoked, the Department may order the business to be locked and sealed. See NRS 360.490. The Revenue Division seeks the assistance of the County Sheriff in the enforcement of the order.(1) See NRS 360.500.
With respect to use taxes, retailers of tangible personal property for storage, use, or other consumption in the State of Nevada must register with the Department and give the following information:
(i) the name and address of all agents operating in the State;
(ii) the location of all distribution or sales houses or offices or other places of business in the State; and
(iii) such other information as the Department may require. NRS 372.220.
Nevada requires that only retailers "maintaining a place of business" in the State of Nevada are required to collect and remit the use tax on sales of tangible personal property for storage, use, or other consumption in the State of Nevada. NRS 372.195. "Maintaining a place of business in this State" includes the following:
1. Maintaining, occupying or using, an office, place of distribution, sales or sample room or place, warehouse or place of storage, or other place of business, in the State of Nevada;
2. Having any representative, agent, salesman, canvasser or solicitor operating in the State of Nevada under the authority of the retailer or its subsidiary to sell, deliver or take orders for tangible personal property;
3. Deriving rentals of the lease of tangible personal property situated in the State of Nevada;
4. Soliciting orders for tangible personal property through a system for shopping by means of telecommunication or television, using toll free telephone numbers, which is intended by the retailer to be broadcast by cable television or other means of broadcasting to persons located in the State of Nevada;
5. Soliciting orders for tangible personal property by means of advertising which is disseminated primarily to persons located in the State of Nevada and only secondarily to bordering jurisdictions;
6. Soliciting orders for tangible personal property by mail or electronic facsimile if the solicitations are substantial and recurring and if the retailer benefits from any activities occurring in the State of Nevada relating to banking, financing, the collection of debts, telecommunication or marketing, or benefits from the location in this State of authorized facilities for installation, servicing, or repairs.
7. The retailers owned or controlled by the same person who owns or controls a retailer who maintains a place of business in the State of Nevada or a similar line of business in the State of Nevada;
8. Having a person operating under its trade name, pursuant to a franchise or license authorized by the retailer, if the person so operating is required to collect the use tax; and
9. Soliciting orders for tangible personal property by means of advertising which is transmitted or distributed over a system of cable television in the State of Nevada. NRS 372.728.
The audit is the first step in the process of enforcing the sales and use tax laws. Table 3 reflects the number of audits performed between the years of 1988 through 1994.
Year |
No. of Audits |
Net Audit Collections |
Full-time Equivalent Auditors |
Recovery Per Auditor |
Gross Sales & Use Taxes |
Audit Recovery % |
Audit Coverage % |
1988-89 |
1,750 |
$ 11,751,470 |
30.00 |
$ 391,716 |
$ 725,453,133 |
1.62 |
5.29 |
1989-90 |
1,952 |
12,436,983 |
30.50 |
407,770 |
832,912,411 |
1.49 |
5.76 |
1990-91 |
2,241 |
14,255,350 |
31.40 |
453,992 |
858,092,902 |
1.66 |
6.08 |
1991-92 |
2,406 |
12,236,967 |
33.90 |
360,972 |
942,851,420 |
1.30 |
6.23 |
1992-93 |
2,449 |
16,914,672 |
37.90 |
446,101 |
1,071,885,920 |
1.58 |
5.92 |
1993-94 |
1,992 |
9,680,085 |
48.90 |
197,889 |
1,229,728,403 |
.79 |
4.64 |
Table 3
The auditor completes the audit and submits the results to an audit supervisor. The audit supervisor reviews the audit and makes any necessary changes. If it is determined that a deficiency exists, the Department will issue a Notice of Deficiency.
The Notice of Deficiency may be served personally or by mail to the taxpayer. See NRS 360.350. In the case of service by mail the service is complete upon mailing. Service of notice tolls the statute of limitations.
Except in the case of fraud or failure to file a return, the Department must serve or mail the Notice of Deficiency within three years after the last day of the calendar month following the period for which the amount is proposed to be determined or within three years after the return is filed, whichever period expires later. NRS 360.355. In the case of a failure to file a return, the Notice of Deficiency must be mailed or served within eight years after the last day of the calendar month following the period for which the amount is proposed to be determined. There is no time limit in the case of fraud. The taxpayer and the Department may agree to extend the statute of limitations by written mutual agreement. Table 4 reflects some of the Department's compliance problems.
| Number Filed | Average Number of Accounts Per Month |
|---|
| Year | Active Accounts | New Accounts | Cancelled Accounts | Bankrupt | Defic. Deter. | Liens | Account Rec. | Delinquent Date | Bond Demand |
|---|---|---|---|---|---|---|---|---|---|
| 1988-89 | 37,025 | 8,801 | 6,158 | 337 | 505 | 293 | 2,018 | 2,482 | 1,157 |
| 1989-90 | 37,819 | 7,659 | 6,425 | 276 | 541 | 361 | 2,023 | 2,644 | 1,281 |
| 1990-91 | 40,481 | 8,745 | 6,818 | 227 | 481 | 414 | 2,191 | 2,946 | 1,264 |
| 1992-93 | 42,862 | 9,009 | 7,745 | 230 | 480 | 415 | 2,445 | 3,261 | 1,411 |
| 1993-94 | 46,289 | 10,073 | 7,564 | 244 | 669 | 519 | 2,273 | 3,457 | 1,420 |
| 51,313 | 12,178 | 8,021 | 272 | 705 | 593 | 2,663 | 4,159 | 1,596 |
Table 4
A taxpayer not satisfied with the Notice of Deficiency may petition for a redetermination within 45 days after service of the Notice. This is the only remedy available to contest a deficiency. If the Petition is not filed within such time period, the deficiency determination becomes final. A form of Petition accompanies the Notice of Deficiency. Form 2 is used currently (See sample of form on following page).
Form 2
Similar to a protest with the Internal Revenue Service, the Petition for Redetermination should include all facts and legal theories upon which the taxpayer bases the redetermination. The regulations of the Tax Commission which became effective on January 12, 1996, but have not been codified provide that:
If a person files a petition for redetermination in a contested case all contested issued involved in the case shall be deemed to have been raised in the petition.
In addition, the taxpayer should request an oral hearing. The rules governing the hearing have recently been extensively revised and will be codified in chapter 360 of the Nevada Administrative Code. It is important to note that all relevant information must be presented at the hearing because any subsequent proceeding will be reviewed only on the record. Accordingly, the taxpayer should prepare an extensive legal memorandum and present any documentation which may be relevant to the redetermination issues.
The hearing is conducted before a designated hearing officer at the offices of the Department. NAC 360.095. Unless otherwise agreed to by the parties, the Notice of the Hearing will be sent at least 10 days before the date set for the hearing. The taxpayer may request that the hearing be transcribed. NAC 360.095. However, if the taxpayer desires a court reporter the taxpayer must furnish the reporter, pay for the transcript and deliver a copy thereof to the director within 20 days after requesting a rehearing or filing an appeal. NAC 360.165. The hearing officer will call the matter and swear the witnesses intending to testify. NAC 360.130. The Department will make a brief presentation of the matter and the relevant issues in controversy. NAC 360.130. The taxpayer then presents its case, submits exhibits and supporting documentation and offers testimony. The taxpayer should also submit a trial brief consisting of legal memorandum in support of the taxpayer's position. It is further recommended that the taxpayer's representative describe the contents of the trial brief for the hearing officer. The Department then presents its case. After the close of the evidence both parties are allowed a summation. As with other administrative hearings, the hearing officer may request supplemental information to be included in the record. The hearing officer will then issue his written opinion, usually within 60 days. NAC 360.170.
The decision of the hearing officer may be appealed to the Tax Commission. NRS 360.245. The Notice of Appeal must be filed with the Department within 30 days (extended from 20 days as of July 1, 1997) after service of the hearing officer's decision unless an appeal is filed. NRS 360.245. The taxpayer must file with the Tax Commission a brief setting forth the points relied upon in its Appeal and the authorities in support thereof and a designation of the parts of the record before the hearing officer that he deems relevant to his appeal. NAC 360.175. However, pursuant to NRS 360.390, an appeal from the decision of the hearing officer to the Tax Commission must be based upon one or more of the following grounds set forth in NRS 233B.135:
That the decision of the hearing officer is:
1. In violation of constitutional or statutory provisions;
2. In excess of the statutory authority of the agency;
3. Made upon unlawful procedure;
4. Affected by other error of law;
5. Clearly erroneous in view of the reliable, probative and substantial evidence on the whole record; or
6. Arbitrary or capricious or characterized by abuse of discretion.
The brief must be filed within 30 days after filing the Notice of Appeal. NAC 360.175. After receipt of the Notice of Appeal and the brief and designation of record, the Department will set a hearing date before the Tax Commission. The hearing before the Tax Commission is normally limited to 20 minutes unless otherwise provided by the Commission, usually at the request of the taxpayer. NAC 360.175. The hearing before the Tax Commission is open to the public unless the taxpayer requests that it be closed. NRS 360.247. The Tax Commission will render a final written decision including separate findings of fact and conclusions of law. NAC 360.180.
If a taxpayer is unsuccessful in his appeal to the Tax Commission, the amount of the deficiency becomes due 30 days after the decision is served on the taxpayer. A taxpayer may, within 30 days, appeal the decision of the Tax Commission to the district court. He must first (1) pay the amount of the determination; or (2) enter into a written agreement with the Department establishing a later date by which he must pay the amount of the determination. NRS 360.395
Before the 1995 Legislative Session a taxpayer could continue to contest a deficiency into district court without first paying the tax. Previously a taxpayer could also allow a determination to become final, pay the tax, then sue for a refund pursuant to NRS 372.635. That option no longer exists to contest a deficiency determination.
If the Department believes that the collection of taxes may be jeopardized by a delay, it may determine the amount of tax liability and serve the notice upon the taxpayer. NRS 360.412. The amount of the determination must be paid within 10 days after the service of notice unless the taxpayer files a Petition for Redetermination within that period. NRS 360.414. A taxpayer who petitions for redetermination must deposit with the Department security as the Department deems necessary. NRS 360.416. The redetermination becomes final if it is not paid within the 10 days and a petition for redetermination is not filed.
Penalties generally fall within two classifications: (1) civil (percentage and interest penalties); and (2) penal (misdemeanors, fines and other criminal penalties). The choice of the Department of Taxation with regard to a given penalty does not foreclose the Department's right to pursue other remedies as well. NRS 372.790.
1. Failure to File a Return.
If a taxpayer fails to file a return, the Department estimates, based upon the best information available, the gross receipts or sales price of property sold during the period, and, based upon that estimate, calculates the amount of sales or use tax due. NRS 360.300. This provision was amended in 1997 to require the Department, upon determining the amount of tax due, to (1) impose interest on the amount of tax determined to be due in accordance with the provisions of 360.417 (i.e., 1.5% per month or fraction of a month until paid), and (2) impose a 10% failure to file penalty on the amount of the unpaid tax.
2. Filing a Return Which Contains Certain Violations. NRS 372.365 was amended during the 1995 Legislative Session to add a new penalty for violations of the requirements relating to the contents of sales and use tax returns. Specifically, the Legislature made it clear that sales are to be reported at the rate imposed by the county to which the tangible personal property is delivered regardless of where the property was purchased. For the first return by a retailer which contains one or more violations, the Department will issue a letter of warning to the retailer explaining the violations. For the next two returns which contain violations of reporting requirements, the Department will assess a penalty equal to the lesser of the amount of tax which was not reported or was reported for the wrong county, or $1,000. For each return thereafter which contains one or more violations, the penalty is equal to the lesser of the amount of tax which was not reported or was reported for the wrong county, or $3,000.
3. Failure to Pay Tax on Time.
NRS 360.417 provides for a penalty of 10% of the unpaid tax plus interest on such amount at the rate of 1.5% per month or fraction of a month until paid.
4. Failure to Pay a Jeopardy Assessment After Notice.
A taxpayer is required to pay a jeopardy assessment of tax within 10 days after receiving written notice of such assessment. NRS 360.414. A 10% penalty is applicable to a taxpayer's failure to make such payment in a timely manner. Id.
5. Failure of Responsible Person to Collect and Pay the Tax to the Department.
The "responsible person" concept was adopted during the 1995 Legislative Session. A "responsible person" is defined to include officers and employees "whose job or duty it is to collect, account for or pay to the department the tax imposed by this chapter." NRS 372.398. If the "responsible person" willfully fails to collect or pay to the Department the sales or use tax he becomes jointly and severally liable with the retailer for the tax owed plus interest and all applicable penalties. Id.
6. Fraud, Negligence And Willful Disregard.
Where fraudulent intent, negligence or willful disregard exists on the part of the taxpayer, the civil penalties assessed against the taxpayer are in the following amounts: (1) for fraud or intent to evade any statutes or regulations, 25% of the amount of the determination, except with respect to any vehicle, vessel or aircraft in which case the penalty is 300% (NRS 360.340); and (2) negligence or intentional disregard of any statutes or regulations, 10% of the amount of the determination. NRS 360.330.
The following criminal penalties are imposed for offenses involving sales and use taxes: (1) a fine of up to $500 for each offense may be imposed upon taxpayers who fail or refuse to furnish a required return, a supplemental return, or other required data or who render a false or fraudulent return (NRS 372.755); and (2) a fine of not less than $300 or more than $5,000, or imprisonment of not more than one year, or both, is imposed upon taxpayers who make a false or fraudulent return with intent to defeat or evade determination of an amount due. NRS 372.760.
Moreover, the following are acts designated as misdemeanors: (1)
unauthorized disclosure of tax information by officers or employees of the Department (NRS
372.750); (2) engaging in business without a valid sales permit (NRS 360.490); (3)
advertising or holding out that the sales or use tax or any part of the tax will be
assumed or absorbed by the retailer, or will not be added to the selling price, or if
added will be refunded (NRS 372.115; 372.205); (4) issuance of a resale certificate for
property that the issuer knows will not be resold (NRS 372.175); and (5) all other
violations of the sales and use tax act. NRS 372.765; 372.215. Under the general statute,
misdemeanor offenses are penalized by a fine of not more than $500 or imprisonment of not
more than 6 months, or both.
1. Relief from Penalties.
If the failure to file a timely return or pay a tax is due to circumstances beyond the control of the taxpayer, occurred without and notwithstanding the exercise of ordinary care, or was not due to willful neglect, the taxpayer may petition for relief from the penalties imposed for these offenses. NRS 360.419; NAC 372.810. Relief must first be sought from the Department of Taxation. The taxpayer may appeal any denial of relief to the Nevada Tax Commission. The Department may waive or reduce the payment of interest or penalty upon the request of any person. NRS 360.419. The standard formerly required of a taxpayer to obtain this relief was that the taxpayer had to show "good cause" for the taxpayer's failure to make a timely return or payment of tax. However, this provision was amended by the 1997 Legislature and the taxpayer must now show that the failure was "the result of circumstances beyond his control and occurred despite the exercise of ordinary care and without intent." NRS 360.419. The taxpayer makes his request for relief under this provision by filing with the Department a statement under oath setting forth the facts upon which he bases his claim.
2. Collection.
The taxpayer may not prevent the collection of the sales and use taxes by injunction, writ of mandate, or other legal or equitable process in any Court against the State or against any officer of the State. NRS 372.670. The Department is given a number of ways in which to collect the amount of sales and use tax due and owing. The Department may internally offset overpayments for a period, together with interest on the overpayment against any underpayment for another period, against any penalty, and against the interest on the underpayment. The 1995 Legislative Session also provided the Department with further tools to collect the sales and use taxes. NRS 372.354 now provides that the retailer shall hold the amount of all taxes collected in a separate account in trust for the state. This clarifies and strengthens the position that the taxes collected by a retailer are never the property of the retailer. The taxes are the property of the state and any conversion of the tax by the retailer is illegal. The trust fund concept is also useful to the Department if a retailer files for bankruptcy. The Department can now make a good argument that the taxes belong to the state and should not be a part of the debtor's estate.
The Department may issue a warrant for the enforcement of any liens and the collection of any unpaid amounts. The warrant is directed to the sheriff and has the same effect as a writ of execution.
The Department has the right to prevent a taxpayer's property held by third parties from being disposed of. These provisions were greatly enhanced and clarified during the 1995 Legislative Session. The Department may notify all persons in possession or control of any property belonging to the taxpayer of the deficiency. NRS 360.510. After receiving such notice the person may not transfer or otherwise dispose of such property and must transmit it to the Department. The person will be personally liable if the property is transferred or otherwise disposed of. Id.
The Department is also protected if a person who owes tax sells any portion of his business or stock of goods. The purchaser is required to withhold a sufficient portion of the assets or the purchase price to pay the tax due. He is required to withhold until he is provided with a certificate from the Department indicating that the tax is paid in full. A purchaser who fails to withhold is personally liable for the tax. NRS 360.525.
The department may also bring an action in court to collect the delinquent tax with penalties and interest.
1 The administrative sealing and padlocking of a business after the permit has been revoked or suspended at a noticed administrative hearing does not violate the Fourteenth Amendment's requirement of due process. However, the Department may not administratively seal and padlock a business which operates without having applied for a license unless it provides an administrative hearing. Att'y Gen. Opn. 79-27 (12/12/79) The person engaging in business without the license will be given ten (10) days notice in writing of the hearing to show cause why the place of business should not be sealed and padlocked.