Close
Close

Nevada payroll tax rate ruled unconstitutional

RFP
Contacts

Hal Bellovin
Iselin
T +1 732 516 7600

Metisse Lutz
Denver
T +1 303 813 3973

Louise Gregory
Denver
T +1 303 813 4049

Grishma Chudgar
Newport Beach
T +1 949 878 3360

Jamie Yesnowitz
Washington, D.C.
T +1 202 521 1504

Chuck Jones
Chicago
T +1 312 602 8517

Lori Stolly
Cincinnati
T +1 513 345 4540

Patrick Skeehan
Philadelphia
T +1 215 814 1743
On May 13, 2021, the Nevada Supreme Court ruled that two revenue-raising measures enacted by the state in 2019 were unconstitutional because they failed to receive a two-thirds supermajority vote in the Nevada legislature as required under the Nevada Constitution.1 One bill extended corporate payroll tax rate increases under the state’s modified business tax (MBT),2 while the other bill preserved a Department of Motor Vehicles (DMV) transaction fee.3 Finding that both bills were revenue-generating measures subject to the supermajority requirement, the Court affirmed a lower court ruling that invalidated the provisions because they passed with merely simple majorities in the Nevada senate, one vote short of a two-thirds supermajority.

Background In 2015, Nevada enacted legislation that reduced corporate payroll tax rates under the state MBT if tax revenues exceed fiscal projections by a certain amount.4 When 2018 tax revenues exceeded the stated threshold, the Nevada Department of Taxation announced the reduction of payroll tax rates effective July 1, 2019. That year, the Nevada legislature introduced Senate Bill 551 (MBT Bill), which would repeal the payroll tax rate reductions and result in an estimated $98.2 million in additional tax collections over the next two-year budget cycle. The bill passed the state Senate by a 13-8 vote and was signed into law. As a result, the legislation extended payroll tax rates indefinitely, leaving a 1.475% tax rate in effect for most employers, and maintaining a 2% rate for financial institutions and mining companies.

The Nevada legislature also approved legislation in 2015 adding a $1 technology fee to every DMV transaction that was already subject to a fee.5 The additional $1 fee was originally set to expire on June 30, 2020. In 2019, the legislature introduced Senate Bill 542 (DMV Bill), which would extend the sunset provision by two years to June 30, 2022. Lawmakers projected an additional $7 million in estimated DMV collections for each year of the extension. Similar to the MBT Bill, the DMV Bill passed the state Senate with a 13-8 vote and was also signed into law.

The Nevada Constitution requires a vote of at least two-thirds of each house of the Nevada legislature to pass any bill that “creates, generates or increases any public revenue in any form, including but not limited to taxes, fees, assessments and rates, or changes in the computation bases for taxes, fees, assessments and rates.”6 After the enactment of the tax extension bills, Senate Republicans and several business groups filed a lawsuit in state trial court, asking the court to invalidate the bills because they did not receive a supermajority vote in the state Senate. The trial court determined that both bills generated revenue and were therefore subject to the state constitution’s supermajority provision. The state appealed the decision to the Nevada Supreme Court, arguing that the supermajority provision did not apply because the bills maintained existing revenue levels rather than increasing them.

Supreme Court decision In affirming the lower court’s decision, the Court examined the plain meaning of the supermajority provision, finding that the words “create,” “generate” and “increase” plainly encompass a bill that results in the state receiving more public revenue than it would have realized without such a measure. The Court further determined that “the provision has broad application and applies broadly to all bills that create, generate, or increase public revenue at any time.” As such, the Court agreed with the lower court that the bills at issue were subject to the supermajority requirement.

Applying the constitutional provision to each of the bills, the Court explained that the DMV Bill created public revenue that would otherwise not exist, meaning that the state would not recognize approximately $14 million in revenue over a two-year period if not for the bill’s enactment. Similarly, the Court reasoned, the state would not receive approximately $98 million in public revenue over a two-year period without the enactment of the MBT Bill. Finding that both bills created, generated or increased public revenue, the Court concluded that the bills unconstitutionally passed the Nevada senate without a supermajority vote.

The Court was unpersuaded by the state’s contention that the supermajority provision did not apply because the bills “maintained” current revenue levels. Specifically, the state argued that the bills removed the reduced payroll tax rates under the MBT and extended the sunset date of the DMV fee before the reduced rates or original sunset date took effect. According to the Court, the state’s argument that current revenue levels remained unchanged ignored the fact that the bills created, generated or increased revenue within the plain meaning of those words. The Court rejected the state’s interpretation that the supermajority provision only applies to bills that directly bring about new increased revenue, because it would require the Court “to read language into the provision that it does not contain.” Finding that both bills did not satisfy the supermajority requirement, the Court concluded that the measures were unconstitutional and affirmed the lower court ruling granting declaratory and injunctive relief to block their enforcement.7

Commentary In striking down the payroll tax rate extension provisions of the MBT Bill in addition to the extended DMV fee, the Nevada Supreme Court determined that the supermajority constitutional provision applied to the bills based on the plain language of that provision. As the “ultimate interpreter” of the Nevada Constitution, the Court determined that the Nevada legislature’s interpretation of the supermajority requirement was not entitled to deference when the law’s language is plain.8 Based on the Court’s interpretation, the measures resulted in additional revenue that would not otherwise exist without the bills, regardless of what tax rates were in effect when the legislation was passed.

As a result of the decision, the state stands to lose over $100 million in revenue that has been collected since the enactment of the MBT Bill in 2019, and approximately $7 million in additional DMV transaction fees expected to be collected between July 1, 2020, and June 30, 2021. As such, the decision may significantly impact state budget projections, forcing the Governor’s office and legislative leaders to reconsider future state budgets. On the other hand, the decision presents significant refund opportunities for impacted employers that collected MBT at higher rates since the 2019 enactment date.



1 Legislature of the State of Nevada et al. v. Settelmeyer et al., No. 81924, Nevada Supreme Court, May 13, 2021.
2 S.B. 551, Laws 2019.
3 S.B. 542, Laws 2019.
4 NEV. REV. STAT. § 360.203.
5 NEV. REV. STAT. § 481.064.
6 NEV. CONST. art. 4, § 18(2).
7 The Court also found that the lower court had properly severed the unconstitutional portions of the MBT Bill, leaving the other provisions of that bill intact. Additionally, the Court agreed with the lower court that the individual defendants – including Nevada Democratic senators and the Nevada governor – should be dismissed from the lawsuit. The lower court had found that the individual defendants were entitled to legislative immunity under Nevada law because they were performing basic legislative functions falling within the sphere of legitimate legislative activity.
8 Citing Baker v. Carr, 369 U.S. 211 (1962); MDC Rests. LLC v. Eighth Judicial Dist. Court, 419 P.3d 418 (Nev. 2018).



This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.