Of Note Nevada

The Internet Tax

The Governor's callfor the recent special session asked that the Legislature consider extending the use tax to online vendors.  The Legislature did not take action on this issue. 

Currently, online vendors without a nexus in Nevada are not required to remit sales or use taxes to Nevada and consequently the purchasers of goods from those vendors do not pay the tax either.

The use tax in Nevada is commonly misunderstood in its application.  The use tax is a compliment to the sales tax.  The sales tax is due when tangible goods are sold in Nevada and is paid by the customer to the retailer who in turn pays the state.  However, when tangible goods are sold from outside of Nevada (and in some other circumstances), such as in an online transaction, the retailer has no legal obligation to pay the state and therefore does not require payment from the customer.  But that does not mean the tax is not owed.  In those situations, the customer directly owes the state the use tax on those goods.  However, because the use tax in this situation is only collected if self-reported by customers, and because enforcement is effectively impossible, many use taxes go unreported and uncollected.  Moreover, many Nevadans are simply unaware that they even owe the state a tax in these situations.

Under the interstate commerce clause of the United States Constitution, states have generally been prohibited from taxing out of state vendors without a nexus in the state.  However, with the recent budget shortfalls across the country states have been more aggressive about trying find ways around that prohibition and to impose use taxes on out of state vendors.  In several states, rather than litigate against such rules, online vendors have simply terminated relationships with in-state affiliates, which has the negative effect of shutting down business for those affiliates.  The vendors thereby eliminate any potential nexus with the state and are able to avoid taxation under the interstate commerce clause.   

Some legislators in Colorado are trying a new tactic.  Instead of requiring online vendors to collect and pay the tax, the proposed legislation would require online vendors to turn over a list of customers and purchases to the state taxing authority, and to provide those customers with a tax invoice showing what they owe on their purchases.  Presumably, the taxing authority would then proceed to collect directly from those customers or alternatively, the online vendor would instead collect and pay the tax as a matter of convenience to its customers.  If that legislation proceeds, it could become a model used by other states looking to shore up declining sales and use tax revenues.  But, the streamlined sales and use tax act under consideration by Congress could accomplish the same result, and in a much cleaner and more uniform manner.  It will be interesting to see if the Colorado legislation gains any steam as Colorado's legislative session goes on. 

The Battle Over the IFC

Today the Governor vetoed Senate Bill 3 from the special session.  SB 3 addressed employee furloughs and related subjects.  One section of the bill required exemptions to the furlough program to be approved by the Interim Finance Committee (IFC).  The veto message specifically cited to that section as part of the rationale for the veto, noting that the Legislature was giving "itself authority to administer and execute the law in violation of the separation of powers provision in the Nevada Constitution."

This is not the first constitutional clash between the executive and legislative branches over the authority of the IFC.  In the summer of 2009, the Governor and the IFC had a very public disagreementover who had the authority to administer stimulus funds.  The Governor threatened to file suit over the constitutionality of the IFC itself on the grounds that it violated the separation of powers clause by exercising legislative authority outside the bounds of a legislative session.  At the end, the IFC backed down and agreed to the proposals set forth by the executive branch, avoiding a legal battle.

Legislators probably should have expected that any legislative attempts to bestow further authority on the IFC would be met with hostility from the administration.  With no chance to override the veto until the next legislative session, legislators will have to wait a while before deciding whether to push the bounds of their authority.

The Latest Round of Fiscal Projections

The Economic Forum is set to meet in two days to provide updated state revenue forecasts for the current biennium.  In an earlier post, I suggested that the shortfall for the current biennium could approach $400 million.  Since then, state revenues have continued to decline and at this point, it would not be surprising if the forecasted shortfall ends up being well in excess of $400 million, possibly even approaching $500 million.  With a fiscal hole of that magnitude, and the apparent lack of cooperation between the executive and legislative branches, the upcoming special session threatens to be lengthy, difficult, and fraught with risky political exposure to elected officials gearing up for an election cycle.

On an interesting legal side note, Nevada law requires that the normal forecasts of the Economic Forum (which occur in the December before a regular session and again in May of a regular session) be used in setting the biennial budget.  However, the statutes are silent as to whether interim forecasts, such as the upcoming forecast, must be used in a special session to adjust an existing biennial budget.  Regardless, both branches used an interim forecast in the summer of 2008, when the Governor called a one-day special session to address budget shortfalls.

Let the Legal Standoff Begin

Today, Assembly Majority Leader John Oceguera penned a letter to the Governor. The letter is in response to a recent directive from the Governor to executive branch agencies prohibiting them from responding to legislative requests for information without the approval of the Governor's Office.  Although the letter is civil in its tone, the inclusion of numerous citations to Nevada law make it clear that the Legislative branch is willing to engage in a legal fight if the directive is pursued.

If the Governor's directive stands, legislative subpoenas will likely start being issued, leaving agency heads in a difficult position.  Presumably the Attorney General will need to weigh in on the issue at some point.

In the meantime, the rhetoric from the executive and legislative branches continue to set the stage for a contentious and lengthy special session, as relations between the branches continue to grow more strained by the day. 

State Budget Situation Worsens

Today Governor Gibbons asked state agencies to plan for budget reductions of up to 10%.  The request comes less than a month after agency heads were asked to submit plans for reductions of up to 3%.  The request can only mean that the administration feels that state revenues will not improve anytime soon and that drastic measures will need to be taken in order to maintain a positive cash flow.

Budget reductions of this magnitude, on the heels of significant spending reductions for the biennium that were approved by the Legislature in early 2009, would likely mean that state employees can either expect longer furloughs or layoffs as the bulk of state spending is on personnel.    Either way, Nevadans will experience a reduction in service levels from state agencies as the state government continues to weather one of the worst economic recessions it has ever experienced. 

It looks like Nevada's elected officials will continue to be faced with the herculean task of maintaining basic service levels in a situation where there are no good solutions.