Assembly Bill 495 and What it Means for Nevada’s Operators
As of July 1, 2021, Nevada Assembly Bill 495 is in effect and the first tax bill is due. What does this tax bill look like and what does it mean for operators?
Nevada State Legislature Building, Carson City. Image by NSHE.nevada.edu
Before you change an institution like Nevada mining, you must first understand it. Before jumping in and dismantling something that has been around since Nevada’s statehood (the “Silver State”) like Article 10 Section 5, we should probably understand why it is there, to begin with. The original article on Nevada taxation of minerals and mining stems from President Abraham Lincoln’s October 31st, 1864 proclamation that Nevada was now a state. In the middle of the Civil War, the Union needed silver, and that silver was coming from Nevada mines. In order to encourage early operations and to ensure a strong supply, Article 10 Section 5 of the Nevada constitution set a net proceeds tax on minerals extracted along with the following statement: “No other tax may be imposed upon a mineral or its proceeds.” The Union knew it needed silver and was determined to ensure a strong supply.
Now, jump forward 156 years… Mining is just as critical, but something lacking in current legislatures across the United States is an understanding of the mining industry, and this leads to misconceptions about the profitability of mines and the ability of a mine to generate more tax revenue. Mines can’t just make more products, or pack up and move operations. Mines are complex businesses, tied to specific locations with margins that fluctuate based on many social, political, and internal factors. Mining is one of the few industries with the sole goal of operating at break-even. Any increase in taxes will fundamentally impact the bottom line of any operation, reducing mine-life and increasing the cutoff grade any way you slice it. Like many commodities, mining companies can’t change the price of the minerals they sell, so they have to absorb the increased operating costs by reducing operational costs (less staff, smaller fleets) or increasing the cutoff grade to meet the new costs and reducing their life of mine (LOM) production.
Again, mining in the State of Nevada has traditionally been taxed under Article 10, Section 5 of the Nevada Constitution. This article established mining as one of the only industries protected in the Nevada constitution and ensured that a tax on net proceeds of all extracted minerals in Nevada was not to exceed 5%. This scale was variable from 2-5% and was taxed as a function of net proceeds as a percentage of gross proceeds, the lowest bracket being 10% and the highest being 50%. However, in the final hours of the 81st Session of the Nevada Legislature (2021), AB495 was introduced and passed by both the Senate and Assembly. The bill was viewed as a compromise to several other proposed tax increases to the mining industry. To better understand the foundation for AB495, let’s look at the other proposals:
Senate Joint Resolution 1
Tax gross proceeds of all minerals at a rate of 7.75%, and amend the vote required to raise taxes from a 2/3 majority in Assembly and Senate to a simple majority vote while leaving the 2/3 majority to reduce taxes.
Set 50% of all funds aside for Nevada residents.
Assembly Joint Resolution 1:
Tax gross proceeds of all minerals at a rate of 7.75%, and amend the vote required to raise taxes from a 2/3 majority in Assembly and Senate to a simple majority vote while leaving the 2/3 majority to reduce taxes.
Set 25% of all funds aside for education, healthcare, and economic assistance for Nevadans.
Assembly Joint Resolution 2:
Increase the net proceeds tax from a cap of 5% to a cap of 12% with the minimum rate tied to the property tax rate in the district the mine is located.
With the financial implications of COVID-19 weighing heavily on the Nevada treasury, a new tax on mining wasn’t going away, so a compromise was created to salvage the industries Nevada operations.
The AB495 bill has two distinct brackets for partitioning what level of tax is applied:
Mining companies that produce gold and/or silver with Nevada gross revenues between $20MM and $150MM
Subject to a 0.75% Excise Tax
Mining companies that produce gold and/or silver with Nevada gross revenues over $150MM
Subject to a 1.1% Excise Tax
The tax brackets of AB495 were designed to keep small mines, often referred to as mom-and-pop operators, from paying the excise tax and focusing on larger producers for the bulk of the tax revenue.
Fundamentally, AB495 is an excise tax on mining. Excise means the tax is due on the product at the time of manufacture rather than the time of sale (as opposed to sales tax). Gold and silver are now taxed in the same realm as alcohol, tobacco, and airline tickets in the state of Nevada. Further, the taxes from AB495 come out of the gross revenue rather than net revenue meaning the tax is applied to the largest revenue figure without deduction for the cost of goods sold (COGS) or other incurred expenses. By AB495’s definition, gross revenue also includes “fair market value of any property and any services received, and any debt transferred or forgiven as consideration.” So, property/project sales, services rendered and amounts realized from possession of the property (royalties) are up for grabs as well.
To see how AB495 taxes will impact an operation, let’s take a look at NGM’s 2020 taxes.
In 2020, NGM produced 1.44MM ounces of gold (a low year). With the average gold price for 2020 at $1,773/Oz, NGM’s gross revenue for the year comes out to $2.55B. The new 1.1% excise tax comes in at $28MM annually. Even with the 0.051% deduction for the Nevada Commerce Tax or “Modified Business Tax,” total tax liability climbs to well over $300MM a year. Image by Barrick.com
There are a few caveats to the bill. AB495 excludes companies that mine minerals other than gold and silver so lithium, barite, gypsum, copper, iron, etc. mining companies are not included. A quick review: KGHM’s Robinson mine, for example, is a primary copper producer, and wouldn’t be subject to AB495, except that KGHM also produces gold and silver as a byproduct at Robinson. How much gold and silver? Enough to be considered taxable under AB495 with gross revenues from silver and gold production exceeding $20MM in gross revenues.
An upside to AB495 could be that Nevada gold and silver mines are now exempt from the Nevada commerce tax due under NRS 363C. The Nevada commerce tax is imposed on businesses with gross revenue of greater than $4MM in the taxable year and variable based on the industry in which the business is “primarily engaged.” For gold and silver mines, this comes out to a 0.051% deduction from the taxes on gross revenues.; however, this deduction would not apply to an operation like KGHM’s Robinson mine where copper is the primary commodity.
It should also be noted that the tax revenue generated by AB495 is to be used in three specific categories:
Counties
State General Fund
State Education Fund
A silver lining, if you will, to AB495 is that the State General Fund will only receive this excise tax revenue through July 1, 2023, after which funds to the State General Fund will be re-routed to the State Education Fund. I see this as an opportunity for the Nevada mining industry to get involved in Nevada’s K-12 programs helping teach Nevada’s students about mining and its necessity. With AB495, counties will continue to receive tax funds giving rural Nevada the means necessary for essential programs and infrastructure in jurisdictions where mining operations are located.
Mining is already the most heavily regulated industry in America. With state governments and the US government pushing to increase taxes on mining, it will quickly become the most taxed as well. As a cornerstone of the US economy and a necessary function of any developed civilization, the more regulations and more taxes placed on mining, the bleaker the future becomes. That said, AB495 was a compromise for Nevada’s miners when compared with the tax bills that could have been passed, but it is certainly of no support to the industry.
Full text of the bill is available here: AB495
