Nevada may soon offer a tax amnesty program
- Jul 10, 2020 | Gail Cole
Nevada is facing a revenue shortfall of approximately $1.2 billion in fiscal year 2020–21 because of the coronavirus (COVID-19) pandemic. To help fill that hole, Governor Steve Sisolak is proposing a one-time tax amnesty program, agency budget cuts, a hiring freeze for state employees, and more.
The proposed tax amnesty would be similar to the state’s 2010 tax amnesty. Like its predecessor, the 2020 tax amnesty program is expected to generate an estimated $10 million in back tax revenue.
How tax amnesty programs work
The goal of a tax amnesty program is to encourage taxpayers with outstanding taxes to step forward and voluntarily pay the taxes they owe. In exchange, state tax authorities typically waive some or all penalties and interest, thus reducing the overall bill.
Some tax amnesty programs are narrower than others. For example, an amnesty could forgive criminal penalties but require full payment of civil penalties and interest. It could waive all penalties but only a portion of the interest. Some permit taxpayers to pay the taxes due in installments; others require payment in full by the close of the program.
Amnesty programs may apply to some or all taxes and fees. In 1993, Nevada conducted an amnesty for the use tax on personal property brought into the state from other jurisdictions — and only that. Yet the 2010 Nevada tax amnesty program applied to 13 taxes or fees, including the state’s bank branch excise tax, liquor tax, modified business tax, and sales and use tax.
Taxpayers must apply for amnesty, and there are usually certain restrictions. For example, individuals and businesses who had entered into a compromise or settlement agreement with the Department of Nevada Tax Commission regarding an unpaid tax, fee, or assessment could not participate in the 2010 Nevada tax amnesty program. Amnesty was also closed to persons and businesses unable to pay the outstanding tax in full in the allotted time period.
Details have yet to be announced for the proposed 2020 tax amnesty program.
Do tax amnesty programs work?
Amnesty programs do increase collections: Louisiana’s 2013 tax amnesty program brought in a staggering $435 million; New York’s first tax amnesty, which spanned 1985–86, generated $401.3 million; and New Jersey’s 1996 amnesty brought in $350 million. Many state tax amnesty programs bring in more modest amounts.
According to research published by the University of Chicago, “a well-publicized amnesty combined with stricter future enforcement considerably increases the level of future voluntary compliance with tax laws.” The threat of a future crackdown on scofflaws seems key, as amnesty programs tend to anger “law-abiding taxpayers who dislike seeing tax breaks given to abusers of the system.”
It’s also been argued that tax amnesty programs are “a short-term solution with long-term problems.” Although originally conceived “as part of a broad scheme of revenue reform” that included increased enforcement activities, they’re now often used to provide a “one-time boost in revenue to balance” the budget. And some argue they discourage timely compliance.
Tax amnesty vs. voluntary disclosure agreement
A tax amnesty program is not a voluntary disclosure agreement (VDA), though there are similarities between the two. Both encourage businesses with outstanding tax obligations to voluntarily step forward and pay the taxes due, in exchange for reducing or waiving financial penalties.
But whereas tax amnesty programs are for registered taxpayers, a VDA is generally only for entities that have not registered to do business with the state as required (e.g., an out-of-state seller that didn’t realize it had economic nexus with another state) — or at least who aren’t registered for the tax in question.
In Indiana, the VDA program is “only available to customers that do not have a brick-and-mortar state filing obligation in Indiana.” Likewise, taxpayers registered with the Pennsylvania Department of Revenue are not eligible for the state’s VDA program. South Carolina’s program is designed for “taxpayers who may have nexus with South Carolina but are not registered with the Department to collect or remit South Carolina taxes.”
Nevada has a VDA. According to the Nevada Department of Taxation, “If a taxpayer is registered for one tax type and voluntarily discloses another tax type, they can qualify for waiver of the penalty and interest pertaining to the newly disclosed tax only.”
Avalara’s free sales tax risk assessment can help you determine where you have economic nexus and an obligation to collect sales tax. The tax experts at Avalara professional services can help guide you through VDAs and more.