Now that Colorado is (mostly) out of the way, attention shifts to the next teacher union-backed ballot initiative to raise taxes. The Nevada State Education Association placed a business margins tax on the November 2014 ballot, but there is some evidence that the public sector union is a little fuzzy on how private sector margins work.
“In this law they are saying you get to deduct your direct cost against this income to compute the tax. And it gives you a couple of alternative ways of computing it. If you don’t want to go through the trouble to figure out what your direct cost is, you can elect to use a default of 30 percent,” says Kelly Bullis, who operates a certified public accounting firm in Carson City. “Now for most businesses I know that is really low. That, by the way, is where I think the teachers made their assumption about how much money they’re going to make. They think everybody has less direct cost than 30 percent, so they’re all going to choose the 30 percent by default. Reality is: I think you’ll see in most businesses their direct cost is 50, 60, 70 percent of their gross income.”
Bullis is correct, but the union defined direct costs as ”the cost of goods it has sold or amount of compensation it has paid to owners and employees.” (emphasis added) In short, you can deduct the costs of your employees, or the cost of your products, but not both. The union’s initiative specifically excludes non-profits – and unions – from its provisions, but it doesn’t exclude the profitless. A business owner can end up paying tax on money he or she didn’t make.
There is a handy example of a business entity that has only labor costs. In 2011-12, NSEA itself took in $8,747,263 in gross revenues. Its initiative-defined direct costs were $3,727,161, or 42.6 percent. If the margin tax were applied to the remainder, it would amount to $100,402.04.
Fortunately, NSEA is exempt, and that money can continue to be used to pay a single UniServ director for the year.