Nevada vs. California Tax Analysis

State Business Tax Climate Index, 2006 - 2009,

Fiscal Years (July 1 - June 30)

Above is a chart that ranks Nevada as the 3rd best State to do business in from a tax perspective (Wisconsin and South Dakota ranked first and second, respectively), while California ranks 48th (the only worse states were Rhode Island and New Jersey).

Nevada provides significant tax advantages to companies locating their manufacturing and/or distribution facilities in the State verses California (and any other state with a corporate and individual income tax). These tax advantages are a compliment to the transportation advantages, namely the ability to reach seven western states overnight and another six states second day at rates traditionally lower than other locations.

The tax advantages achieved by locating in Nevada vs. California arise from California Public Law 86-272. Under this law, the state of California cannot impose a state income tax on an entity which “solicits orders, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejections, and if approved, are filled by shipment or delivery from a point outside the State.”

In laymen’s terms, if a company merely solicits sales in California and does not have payroll (other than a sales force), real estate, equipment or inventory in California, that company is not subject to California income tax. However, if the company manufactures or distributes inventory from within the state of California, the company would be subject to state income tax.

Now the number crunching. The corporate income tax rate in California is currently 8.84% and the individual income tax rate in California is currently 9.55%. The rate used in any analysis is determined by whether the company is a C-Corporation or a pass through entity such as an S-Corporation, LLC or Partnership. C-Corporations will be subject to the corporate tax rate of 8.84%, S-Corporations are subject to a tax rate of 1.55 and additionallye the shareholders, members or partners of pass through entities will be subject to the individual tax rate of 9.55%. California taxes entities utilizing an apportionment factor.

For example:

In this example, the company generated a tax liability of $39,780, which may be completely eliminated by locating inventory in Nevada. Additionally, sales to other states with corporate and individual income taxes, which are serviced out of a Nevada distribution facility, would minimize that companywide state income tax exposure. This is a significant benefit for a company locating its west coast distribution facility in Nevada.

This analysis is very cursory and any company planning to establish a west coast facility may wish to perform a complete sales tax analysis. This analysis would take into consideration actual sales, inventory, payroll, rent and equipment figures by state and in total. This analysis would also consider the various states a company operates in and the related income tax rates. Numerous companies such as Microsoft, Oracle, Intuit, Gannett and Starbucks have moved operations to northern Nevada to benefit from the state tax laws and central distribution location.