Sparks Nugget Decision

In April 2008, the Nevada Supreme Court released a confusing opinion holding that complimentary meals given to casino patrons and employees were not subject to use tax. The first reaction of some was that the decision was simply pandering to the special interest constituency of the hospitality industry. Nevertheless, the reasoningcited by the Court—if not the Court’s own reasoning—does provide a useful basis to taxpayers and practitioners for future decisions.)

Why the Sparks Nugget decision came out right, and what it should have said?

The Court explicitly limits its discussion to use tax because the Department did not preserve a sales tax issue. The more interesting issue would be trying to find a transaction for sales tax purposes. In such a situation, the Constitutional issues would no longer overshadow the statute because even the Constitution anticipates the taxation of food sales for immediate consumption. The Supreme Court’s decision’s best reason for its decision that complimentary meals are not subject to use tax is buried in the middle of a paragraph on page 12. The Court reasoned that no taxable event occurred because Sparks Nugget was not the purchaser of the meals. This summary dismissal invites further analysis because it fails to deal with any mechanics. In general, use tax is imposed on the purchaser of food sold at retail.

NRS 372.185
An excise tax is hereby imposed on the storage, use or other consumption in this State of tangible personal property purchased from any retailer . . . for storage, use or other consumption in this State . . . .

NRS 372.190
Every person storing, using or otherwise consuming in this State tangible personal property purchased from a retailer is liable for the [use] tax.

In addition, use and sales tax are complementary, but exclusive, alternatives.

NRS 372.345
The storage, use or other consumption in this State of property, the gross receipts from the sale of which are required to be included in the measure of the sales tax, is exempted from the use tax.

Based simply on the structure of the use tax regime, the Department of Taxation must be first identify a transaction between a retailer and a purchaser. The casino’s purchase of unprepared food was from food distributors. As to all food later resold, the distributors were wholesalers so use tax could not apply. Moreover, as to food that was not resold, the fact that the food was not for immediate consumption prevented its taxation according to both Article 10, Section 3(A) of the State Constitution and its statutory reflection in NRS 372.284. This result follows regardless of whether the Department recharacterized the distributor as a retailer.[1]

The alternative characterization of complimentary meals which would at least identify a purchaser and a retailer would have to treat the casino as having bought the comped meals from itself and then further consider that giving the meal to patrons was an act of use or consumption by the casino.  But the analysis could never reach the second point because if the casino bought the meal from itself, then it would have been subject to sales tax, not use tax, so the assessment would be for a sales tax deficiency. Under NRS 372.345, where sales tax is due, use tax cannot be imposed. Under the general collection rule, there was no way for the Department of Taxation to establish the necessary parties in order to imposes any statutory obligation on them.

Instead of focusing on the failure to show the necessary parties, the Supreme Court pegged its analysis to the Indiana Tax Court’s decision in Horseshoe Hammond v. Dept. of State Revenue, 865 N.E.2d 725 (Ind. T.C. 2007). While the Court was apparently comforted by the synoptic view of a sister court, the analysis of Horseshoe Hammond leaves practitioners with nothing to hold on to. And this lack of guidance remains despite the Court’s own complaint that use tax principles are “ever-elusive.” 124 Nev. Adv. Rep. at 12 n.31.

The problem the opinion ignores is that, in Nevada, a “sale” for purposes of sales and use tax occurs when a meal is served for consideration. NRS 372.060(c)(3).[2] Because the Court is silent on the (in)applicability of this rule, its unsophisticated, though repeated conclusion that there was simply no taxable event when the meals were provided without charge leaves more questions unanswered than it resolves. That said, if the holding of Sparks Nugget is that Nevada adopted Indiana’s approach wholesale, then there is a slightly more satisfying answer: discretionary free meals are not “for consideration.” In Hammond Horseshoe the Indiana court held that while legally sufficient consideration might be very small indeed the patrons must have nevertheless bargained. The argument before the Indiana Tax Court was that the Horseshoe Hammond casino gave its complementary gifts in return for “continued gaming activity and customer loyalty.” 865 N.E.2d at 728. The court found, however, that even if it imputed that expectation to the casino, the patrons would not, in fact, have bargained for the gifts or promised loyalty or continued patronage. The holding of Sparks Nugget relating to complementary patron meals[3] is comprehensible if it is based on—even though the opinion does not itself state—the intermediary conclusion that without a bargained for exchange, there was no consideration and thus no taxable transaction.

The provision for retailer collection of use tax is likewise overlooked in the Sparks Nugget opinion though, based on the foregoing, this provision would produce the same result. The exception shifts primary liability of the retailer for the collection of use tax where the retailer is present in Nevada and the personal property was purchased for use in Nevada:

NRS 372.195
Collection by retailer; purchaser’s receipt. Every retailer maintaining a place of business in this State and making sales of tangible personal property for storage, use or other consumption in this State, not exempted under NRS 372.260 to 372.350, inclusive, shall, at the time of making the sales or, if the storage, use or other consumption of the tangible personal property is not then taxable hereunder, at the time the storage, use or other consumption becomes taxable, collect the tax from the purchaser and give to the purchaser a receipt therefor in the manner and form prescribed by the Tax Commission.

Even under the exception, the duty of a business to collect use tax only arises in a retail transaction. Absent an identifiable retailer for the transaction, the Department would have no basis charging use tax on someone dispensing complimentary meals.  The assessment fails absent an identifiable transaction—one, moreover, which must also not trigger sales tax liability and thus preclude use tax liability.

The Supreme Court missed an opportunity to clarify the “ever-elusive” use tax concepts but even though it avoided the fundamental elements, it arrived at a defensible result.

Principles of avoiding taxes on complimentary food

Serving free food would be a taxable sale in Nevada if there is a quantum of consideration. Horseshoe Hammond is based on the patrons having no influence on the gifts. If there is a defined promotion, package deal, or contest, the food would likely be a sale and therefore subject to sales tax. The above reanalysis of Sparks Nugget focuses on the failure of the Department to demonstrate the statutory elements of a purchaser, a retailer, and a sale. But if a meal were successfully recharacterized as an identifiable transaction under NRS 372.060(c)(3), it would be treated as if the casino sold the patron the meal in exchange for the bargained-for behavior causing the obstacles to taxation to evaporate. Indiana has decided that the tax would be imposed on the cost-value of the meal rather than the retail-value, but given Sparks Nugget was silent on the mechanics of the rules, it is natural for it to have also been silent on the calculation of taxes.

[1] Said another way, had the casino given complimentary items from its gift shop, the initial sale of such items to the casino, though presumably initially purchased for resale, could be successfully reclassified as a retail sale to the casino itself as the end user. NRS 372.170. The reason Sparks Nugget was correctly decided is not because recharacterizations are improper but that the existence of a specific exception prevents the taxation of even the recharacterized transaction.
[2] In fact, the court dismisses the question of whether there has been a sale or not as relating only to the unpreserved issue of sales tax applicability. 124 Nev. Adv. Rep. at 7–8 n.15. This offhand dismissal ignores that the use tax provisions are likewise triggered only by retail sales.
[3] The short-circuited, analysis-by-proxy approach taken by the Sparks Nugget opinion provides no satisfactory basis its exemption of complementaryemployee meals from tax.