Noncompliance with Nevada's business tax law is at significant levels because the Department of Taxation lacks effective enforcement methods. Current methods do not ensure businesses subject to the tax are identified or pay the proper amount. As a result, about 10% of the businesses required to pay the tax in 1993 failed to do so. Furthermore, of those businesses that did pay, about 1 in 3 paid less tax than the amount required by law.

Information is available from many sourcesincluding the Department's own recordswhich would allow detection of noncompliance through computer matching. But the Department has not used this technique, instead relying on audits to identify business tax violators. We estimate business tax collections can be increased by $3.6 million during the next biennium if improved enforcement methods, such as computer matching, are used. Computer matching will also enable the Department to detect noncomplying businesses without having to rely solely on audits.

Principal Findings

1. We estimate 3,000 of the 30,000 businesses subject to the tax in 1993 failed to pay, resulting in lost revenue to the State of about $1 million. Furthermore, results of audits conducted by the Department indicate 36% of the taxpayers underpaid. We estimate underpayments totaled about $700,000 in 1993. (page 11)

2. Comprehensive methods to identify new businesses subject to the tax are not yet in place. Based on our testing, over half the businesses that failed to pay during 1993 started in business since the tax went into effect. Many of these businesses claimed to be unaware of the business tax law. (page 13)

3. The Department failed to use existing taxpayer information to detect noncompliance. Of the nonpaying businesses found in our testing, 20% were already in the Department's sales tax or business tax systems. (page 15)

4. One method to detect noncompliance is computer matching; however, the Department has not used this technique. We matched information in the business tax system with ESD data to identify businesses that failed to pay. Computer matching would be a cost-effective enforcement method allowing the Department to better use available audit resources. (page 16)

5. The Department's business tax files had over 3,200 incorrect or missing Federal I.D. numbers. Taxpayer I.D. numbers are crucial for computer matching to be cost-effective; therefore, the Department needs to ensure its data is accurate and reliable. (page 19)

Area for Further Review

In fiscal year 1994, collections from sales tax audits declined by $7 million from the previous year. This drop occurred during the period when the audit functions of the State Industrial Insurance System (SIIS) and the Employment Security Division (ESD) were being consolidated into the Department of Taxation. Consequently, we believe the consolidated audit function of the Department of Taxation, and its effect on sales tax collections, SIIS premiums, and ESD contributions, should be considered as an area for further review. (page 8)