Sunday, February 15, 2004
Copyright © Las Vegas Review-Journal

NEW NEVADA LEGISLATION: Banks hit hard by payroll tax

Levy may be disaster for many small businesses

Silver State Bank CEO Tod Little appears in the 400 N. Green Valley Parkway branch on Feb. 5. The bank has a quarterly payroll tax bill of $50,000. It will cost 5 percent of the bank's net income. Photo by Clint Karlsen.

The payroll tax that the Nevada Legislature enacted into law last year is an annoyance to some big employers but a disaster for some small ones.

Companies affected by the new tax range from an independent banker who worries about having to shut down branches in small towns to a large casino operator who considers the tax a disincentive to hiring new workers. Among others who will be hit by the tax include a woman who hired people to take care of her invalid mother at home.

The first quarterly tax bill under the law, which imposes a tax on companies' total payroll budgets, was due Jan. 31, and many businesses are already smarting.

But few are as angry as bankers.

The payroll tax imposes 2 percent taxes on bank employee wages, with a dollar-for-dollar credit for any medical insurance expenses provided to employees. Banks are also paying a new $7,000 annual fee for each Nevada branch after the first one.

That's more than three times the tax on businesses that are not classified as financial institutions. All other businesses pay a 0.7 percent tax on employee payrolls, although the rate will drop to 0.65 percent Aug. 1. Businesses also can deduct the cost of medical insurance benefits provided to employees.

Casinos also pay the new payroll tax, plus a 6.75 percent tax on gross gaming revenue, up half a percentage point as a result of legislation last year.

One of the hardest-hit banks is Nevada Bank and Trust Co. It serves some of the state's smallest, most remote cities: Carlin, Pioche, Alamo, Elko, West Wendover, Ely and its home town of Caliente. Nevada Bank dates from 1978 and has $70 million in deposits, making it one of the smallest banks in Nevada.

Nevada Bank Chief Executive Officer Barry Smith said the new tax will cost his bank about $90,000 a year. He worries about being forced to lay off some employees and close branches.

"It's not something that the bank is looking to do. It is something that it may have to do," Smith said. "We have to look at the impact. What is it going to do to the community or the communities around these (branches)?"

Alternatively, Nevada Bank can try to absorb losses and hope the Legislature will change the tax law at its next session in 2005.

Tod Little, chief executive officer of Henderson-based Silver State Bank, has 110 employees and a quarterly payroll tax bill of $50,000 -- 5 percent of his bank's net income.

"We don't have a privilege license (like casinos)," Little said. "We don't have an edge over any other kind of business. So why should I have to pay more taxes than anybody else? It's not right, and it's not fair. To me, it's immoral.

"(Silver State) will have to evaluate the profit of our branches, and this tax thing makes some branches unprofitable."

Bankers such as Little and Smith are even angrier that credit unions were exempted from paying the new tax. Credit unions already are exempted from federal income taxes. Yet credit unions are starting to serve whole communities and even small businesses, not just workers at a few businesses. In doing so, they compete with banks.

Assemblyman David Goldwater, D-Las Vegas, who was vice chairman of the Assembly Taxation Committee, says bankers have no one to blame but their lobbyists and those of other business groups for the payroll tax.

"The payroll tax is something that Democrats in the Assembly and a lot of Democrats in the Senate fought against," Goldwater said.

"I hated the payroll tax. I still hate the payroll tax. That was the worst that we had before us, and we fought like crazy to keep it out, but it's what the businesses wanted," Goldwater said. "They got what they wanted, and now they're complaining about it."

Business-interest groups favored an increase in the sales tax and property tax, but Democrats opposed raising those taxes, because individuals pay those types of taxes, Goldwater said.

Sen. Dina Titus, D-Las Vegas, agreed with Goldwater and mentioned that the Las Vegas Chamber of Commerce backed the payroll tax, rather than a gross receipts tax that would have exempted some small businesses.

"Not a single other state has a payroll tax like what we just passed," Titus said.

Chamber spokeswoman Catherine Levy acknowledged the Las Vegas Chamber of Commerce favored a payroll tax over the gross receipts tax. Levy said some critics have accused the chamber of backing a tax that was more detrimental to small business. But she said some small businesses agreed with the chamber's position.

At one point, the Legislature discussed exempting the first $450,000 of business receipts, which would have exempted most small businesses. The chamber feared the Legislature would lower that number later to raise more revenue, Levy said. The chamber objected to gross receipts, in part, because it taxed businesses without regard to profit, she said.

Democrats and the gaming industry favored a gross receipts tax as one that would be broad-based, but business lobby groups opposed that proposal. Goldwater said banking leaders objected to a franchise tax, although 41 other states have franchise taxes on banks.

"The banking industry pays far less taxes than it does in other states," Goldwater said. "Nevada doesn't deserve less than people in other states."

As a result of the new law, Wells Fargo Bank pays $180,000 a quarter for its branches. Kirk Clausen, president of the Nevada bank, said the bank pays another "several hundred thousand" a quarter for its payroll.

The tax does cause the bank to look a little bit harder at the feasibility of opening new branches, Clausen said. Yet, Wells Fargo still plans to open between six to 15 branches in Nevada in the next two years.

"We are committed to the state of Nevada," he said. "We want to be a statewide bank in Nevada. It is, in fact, a stated internal goal of ours. We would love to some day do a lot of business with the state."

Station Casinos, the Las Vegas-based casino company, employs 11,000 people in Nevada and will pay $2 million in payroll taxes yearly.

"Business has been great, and we continue to hire at about the same pace," said Lesley Pittman, a spokeswoman for Station Casinos.

"The payroll tax was a disincentive to job creation and to enhance livable wages in the community," she said. "Of course, any tax increase is a concern to shareholders."

International Game Technology, the Reno-based slot machine maker and largest manufacturer based in Nevada, estimates it will pay $1.3 million yearly in payroll taxes this year for its 3,400 Nevada workers.

IGT supported a "broad-based tax" as did many of its customers, who operate casinos, said Ed Rogich, a company spokesman.

"We're happy to pay our share," he said. "It's just a matter of business when it gets down to it."

MGM Mirage claims to be the largest employer in Nevada, with more than 30,000 workers in the state, but spokeswoman Yvette Monet declined to comment on the payroll tax.

Nevada Power Co. disclosed that it has 1,800 employees but declined to disclose the amount of its payroll taxes. Southwest Gas Corp. counted 1,250 employees in Nevada and said it paid $129,000 in payroll taxes for the quarter.

Leo Falkensammer Sr., who employs 175 people at Prestige Travel, expects his payroll tax to total more than $40,000. He sees it as just one more factor squeezing his profits.

If he raises the price of his service, travelers will buy airline tickets, hotel rooms and travel arrangements online instead.

Prestige also sells packages to visitors coming to Las Vegas hotels.

"That can be done anywhere," he said, noting that call centers in North Dakota compete with his company in selling cruise vacations.

He is trying to make his computers more efficient and planning to reduce his staff by attrition.

Donne Dow, owner of Salsa by Donne, fears the tax because she believes she will soon need to hire her first employee.

"It costs a lot of money to run a business," said Dow, who makes her salsa in a commercial kitchen. "There's always something you don't anticipate," such as the payroll tax.

The payroll tax also applies to people who employ gardeners and housekeepers, not just businesses. They are required to pay the payroll tax if they compensate workers $1,000 or more in any quarter of the current or previous year, said David Turner, a partner in the Reno accounting firm, Turner Loy & Co. He also is a member of the Nevada Tax Commission and a director of the Nevada Taxpayers Association.

Turner said the public may not sympathize with affluent families who have household employees, but he also has a client who hires workers to provide home health care for her invalid mother. She's also required to pay the tax.

He also believes the law requires political parties to pay the tax if they employ workers. The law exempts nonprofit organizations as defined under a section of the Internal Revenue Code, but the federal law addresses political parties in another section.

Democratic and Republican party officials didn't return calls for comment.

Paragon Asset Management, which manages investments for banks and government agencies, doesn't consider itself a financial institution. It extends credit to no one, partner Bob Kasner said.

Still, the law classifies the firm as a financial institution and Paragon's tax bill is increasing by about eight times as a result.

In a letter to Kasner last year, Bob Hardy, a Republican assemblyman, said the Legislature adopted the payroll tax in a rush.

"As you know, this bill was drafted in haste and, looking at it now, with more time to reflect, I realize that some of its provisions are not as precisely worded as they should have been," Hardy wrote.

Said Kasner: "The law definitely captures us; there isn't any question about this. The problem is I don't think they can fix this until the next legislative session."

Marel Giolito, chief executive officer of Las Vegas-based Credit Bureau Central and president of the Nevada Collectors Association, said collection agencies also are treated as banks for the purpose of the tax. She employs 35 people, including some who perform credit reporting services, rather than collection duties. She figures the collection agency payroll alone will cost her $20,000 in annual taxes based on the 2 percent tax for financial institutions.

The Legislature didn't intend to tax companies like hers, she said.

"We were this `oops,' " she said.

Some collection agencies are doubly upset, because the state Purchasing Department contracted with Outsourcing Solutions of St. Louis instead of a Nevada company.

"(The payroll tax) is not nearly as simple as everybody hoped. I think they are going to tweak some things," Turner concluded.

Although the law has created grief for some, maybe the grief was, on some level, necessary, Turner said.

"Maybe that is the kind of fallout that is necessary to get our Legislature to look at this again," he said.

Titus doubts that will happen, given the legislative gridlock over tax debates last year.

"I think everybody's afraid to touch taxes," she said. "They don't want to do it again."