Taxable Talk

The Tax Foundation released their 2012 State Business Tax Climate Index today. And it was no surprise to see the bottom three composed of California, New York and New Jersey. These states have high taxes overall (California adds high regulatory costs, too; however, the business climate index ignores this). Meanwhile, Wyoming, South Dakota, and Nevada are the top three states. No surprise: These states don’t have high taxes (they don’t have personal or corporate income taxes at all).

Here are the top ten:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah

And the bottom 10:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey

For those who wonder if business pay attention to taxes, I can speak from experience: They do.

I’ve moved into my new office, and everything is more-or-less running correctly in my new office in Las Vegas. There’s a new fax number (yes, there’s a real fax machine in my office) for those who need to send me a fax. So I’m back in business.

However, now that I’m a Nevadan, there’s the issue of the deduction for sales tax. That’s not going to be an issue for 2011 (individuals can choose between deducting sales tax or income tax for this calendar year), but as of now the deduction for sales tax will vanish for 2012. It’s vanished before (most recently, in 2009) but was retroactively reenacted; this may happen again for 2012. We’ll have to wait and see.

Today’s closing price for silver is $32.72 an ounce. Meanwhile, Gold is $1,749.35 an ounce. So how can silver be better than gold?

If you’ve been a reader of this blog, you’ve seen me write numerous times about California’s tax and economic policies. Bluntly, if California were a corporation, it would be delisted from the Pink Sheets. (For those unfamiliar with the “Pink Sheets”, that’s the home for stocks that get delisted from the NYSE, American Stock Exchange, or NASDAQ.) Meanwhile, the only recipe that Democrats in Sacramento have is to increase taxes.

My tax bite is roughly 10% to California. For every dollar I make, ten cents goes to Sacramento. (Yes, I get a benefit from that in that state income tax is deductible on federal tax. However, because of the Alternative Minimum Tax even that benefit is capped.) For the past few years I’ve considered if I could move my business to a friendlier environment. Earlier this year, I decided to do so.

I’ve sold my house in Irvine, and am in the process of purchasing a home in the Las Vegas area. I will be in a much friendlier business environment, with a lower cost of living. The home I’m purchasing is nearly double the size of my current home and costs almost 50% less than what I sold my current home for.

There comes a point where decisions are forced on you. With the growth of my business, I looked at possibly hiring another tax accountant in 2010. When I ran the numbers, I found that I would lose money by hiring a productive tax accountant. That’s because of all the regulations and costs that I would immediately incur if I had an employee. I’m not stupid: If I lose money by hiring someone, I’m not going to do it.

Yet my business was (and is) growing, and I had to do something. As you may know, I’m adding a partner (Aaron Lion, E.A.). He’s based near D.C. rather than California. As of a week from now, I will have executed my own Escape from California.

Democrats in Sacramento constantly say that with all of California’s advantages (and the state does have a lot: great climate, a large diverse population, and diverse industries) that increasing taxes doesn’t impact employment. That’s hogwash. It’s driven large companies (e.g. Nissan) to Tennessee. It’s driven me to the Silver State, Nevada. Sure, I’m just one job but the money I earn goes to support others’ incomes. That will still be the case, but not in the Golden State, California.

With the movers coming tomorrow, and everything that’s been happening with the move and with what will happen over the next two weeks, it’s likely that posting will be minimal until mid to late December.

A repeat for the fourth year follows, but it’s one again getting a lot of play due to business conditions here in California. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada incorporating in the Silver State can be a very good idea. But thinking you’re going to avoid California taxes just because you’re a Nevada corporation is, well, bozo.

When last I reported on the Gilbert Hyatt case, Mr. Hyatt had won nearly $400,000,000 (yes, that’s $400 million) in a lawsuit from the Franchise Tax Board. This case began when Mr. Hyatt moved from California to Nevada in 1992, but the Franchise Tax Board didn’t think so. So agents of the FTB rummaged through Mr. Hyatt’s garbage in Nevada, and in the view of a Las Vegas court, committed torts against Mr. Hyatt. Including legal fees and continued interest, the tab is now around $500 million.

This case went to the US Supreme Court before it was tried; the FTB attempted to hold that California couldn’t be sued. The Supreme Court ruled against the FTB, and the case was tried in 2008…ten years after it was filed.

Not surprisingly, the FTB has appealed the decision. I’ve been trying for a while to discover the status of the case, and this evening finally found a blurb noting that the case is awaiting a date for oral arguments at the Nevada Supreme Court. [Go to page 12 of the link to see the status.] (Nevada does not have intermediate courts of appeal.) So sometime in the next year or so we’ll likely get a final verdict on how much the Golden State will be out in this case. Of course, the FTB could appeal this case to the US Supreme Court if they lose at the Nevada Supreme Court.

Meanwhile, the underlying alleged liability that triggered the whole fiasco–whether Mr. Hyatt was a California resident when he earned money off a semiconductor patent–is trickling through the California administrative hearing process.

The Nevada Development Authority is once again looking to move businesses in Southern California to Las Vegas. A series of new advertisements will feature talking primates; here’s one of the ads:

Personally, I liked the lipstick pig advertisements better. No matter what the ad, though, the case that Las Vegas makes is real. California is high tax, and high regulations. Nevada isn’t. What I’d like to see is the California legislature looking toward small business. Unfortunately, for that we might need one of these:

A couple of weeks ago I wrote about the coming crackdown on nightclubs, taxi drivers, and doormen in Las Vegas. One nightclub chain, Pure, yesterday took what they hope will be preventative action. Pure implemented a compliance program.

Of course, the cynic in me notes that (a) Pure’s corporate offices were raided two years ago by the IRS; (b) the IRS announced a few weeks ago that they would take action if the clubs didn’t clean up their act; and (c) Pure waited until after that announcement to implement their compliance program. It also remains to be seen if this will be a program that’s just down on paper or if Pure will actually start issuing 1099s to doormen and drivers delivering patrons to their nightclubs…not to mention the $100 bills that doormen receive so that individuals can avoid the lines.

In any case, I suspect the IRS may have some undercover investigators noting the payments made to drivers and others and then checking next year to see whether 1099s were sent. I think the IRS is serious about this, and if I were running nightclubs in Las Vegas I’d strive to be pure…in relation to the tax laws.

I’ve made plenty of posts on strip clubs and how some owners of these clubs manage to “forget” to report all of their cash income. Well, I’m heading to Las Vegas next week for the annual California Society of Enrolled Agents’ SuperSeminar. There’s a battle shaping up in Las Vegas: the IRS versus strip clubs, doormen, and taxi drivers.

There are many strip clubs in Las Vegas. Suppose you own one of these clubs; how could you draw more customers? While advertising, signage, and word-of-mouth will clearly help, there are obvious limits to this given the nature of your business. So strip clubs pay out “finders’ fees” to doormen and taxi drivers.

Of course, that cash being paid out is taxable (all income is taxable unless exempted by Congress). But how much of it actually gets reported? If you guessed “about zero,” you’d be correct. And the IRS isn’t happy about this.

Doug Elfman of the Las Vegas Review-Journal reported on this last week. The IRS discovered how much cash was being thrown around (at least $100 per person brought to a club) and read club owners the riot act: Start following the law and issue 1099s or find yourselves at ClubFed.

Mr. Elfman noted that there’s one industry in Nevada that scrupulously follows the law: brothels. The oldest profession in the world knows to be smart with the IRS. We’ll see if the clubs follow suit or end up in trouble with the IRS.

While California has been on center stage with its budget troubles, Nevada, too, has had problems. The Silver State is facing an $887 million budget deficit (by comparison, California is facing a $19.9 billion deficit). Unemployment is high, and revenues in the gaming industry fell by the largest percentage ever in 2009.

Governor Jim Gibbons (R) has proposed two tax increases (mining and sales) but in his view they’re not tax increases. “That is not a tax increase if you look at it carefully,” Gibbons said about the mining-tax proposal. “That is simply clarifying the deductions that they are allowed to take.” Well, when taxes go up it’s an increase. I’ll ignore the semantics and say that’s what’s happening.

Meanwhile, Democrats in the Nevada legislature also want to increase taxes according to a story in the Las Vegas Review Journal. Since it appears that the only people who don’t want taxes to increase in Nevada are Republicans in the legislature taxes are going up in Nevada.

As I’ve been saying about California, what must happen everywhere is that spending needs to be cut to revenues. Pension benefits will need to be cut. Public employees salaries will be decreasing in the future. That’s the reality: The public (voters) don’t want tax increases. If you’re running for office, ignoring the voters is a way to head to a new career.

A California State Assemblyman is upset with the ads that the Nevada Development Corporation is running. California is golden, and Nevada is silver. Why would any business leave? Here’s Assemblyman Jose Solorio’s (D-Anaheim) response:

Before I comment on that, there’s also a great op-ed piece in the Dallas News about the difference between California and Texas. One state is gaining business and one is, well, issuing IOUs. Hint: California isn’t the golden state in comparison to Texas.

As for Assemblyman Solorio, he may want to watch these two short spots.

It’s one thing to say, “California is great.” Can Assemblyman Solorio deny that it costs far more for a business to operate in the Golden State than it does in the Silver State? Unfortunately, everything in the Nevada Development Authority’s advertisements is true.