During the 2011 Nevada state legislative session the specter of a Texas-type margin tax was raised as a replacement to the Modified Business Tax we now “enjoy”. Fortunately, it never got traction. But guess what? Its back and now it is being proposed in ADDITION to the Modified Business Tax, not in lieu of.

How would this new Margin Tax work? It seems simple enough, but the devil is in the details.

As proposed, the tax would apply to firms with annual taxable revenues over $1,000,000. Such entities would have to pay a 2% tax rate calculated on a tax base of their choosing:

1. 70% of total revenue
2. Total revenue less wages
3. Total revenue less the cost of goods sold

Having to choose amongst these various tax bases makes the process considerably more complicated, partly because the costs included in “cost of goods sold” can be subject to interpretation. Furthermore, such a tax could potentially penalize businesses that are actually incurring net losses due to other operating expenses, but still have a positive gross profit.

The Texas margin tax has been judged an abject failure. Let’s hope we here in Nevada do not step into the same trap that has ensnared Texans.