How Tesla uses cash from Nevada casinos to boost its bottom line
Given Elon Musk’s dubious track record for hitting his goals, it may be a roll of the dice whether the Tesla CEO delivers a profit later this year. Fittingly, his success will depend partly on money from Nevada casinos.
Since 2015, Tesla has boosted its bottom line by selling tax credits to casinos such as the MGM Grand.
For the record:
11:00 p.m. June 24, 2018The time period in which Tesla doesn’t have to pay sales-and-use, property and general business taxes has been corrected. It is 10 to 20 years.
The casinos use the credits, purchased at a discount, to lower the gambling taxes they pay the state. Tesla uses the proceeds to ease its losses or increase its profit. Musk told investors on June 5 that “it’s looking like” the company will be profitable later this year.
So far, Tesla has sold $131 million in credits to casinos and has booked a total of $163 million in anticipation of more sales soon.
Millions more will probably be used in the quarters ending in September and December. That could be enough to swing a loss to a profit for the company.
Tesla may be profitable in the second half of this year partly because of tax credits sold to casinos.
And Tesla’s accelerated rate of cashing in the credits could have consequences for the state of Nevada’s bottom line too. It has blown a big hole in the state budget surplus that Nevada officials expected for the fiscal year beginning July 1.
The state lured Tesla’s giant lithium-ion battery plant to a site outside Reno by promising $1.3 billion in incentives. Most of that is in the form of tax exemptions — Tesla doesn’t have to pay sales-and-use, property and general business taxes for 10 to 20 years.
But the state also gave Tesla $195 million in transferable tax credits, which the company can’t use unless it sells them.
There are still up to $32 million in tax credits unsold and unbooked. A Tesla spokesman said that only $10 million of that “likely” will be used to boost profits in the third and fourth quarters although as much as $17 million will be available to Tesla starting July 1. An additional $15 million will be available to sell the following fiscal year.
With Tesla racking up $2.2 billion in losses last year on sales of $11.8 billion, $17 million in casino cash could almost be considered a rounding error. The Nevada credit sales “will not have even a close to material impact on our profitability,” said the Tesla spokesman, who asked not to be named.
But it might be enough money to boost Tesla from a quarterly loss to a quarterly gain. The company has lost more than $5 billion over its 15-year history and has posted only two quarterly profits: $15 million in the first quarter of 2018 and $22 million in the third quarter of 2016.
The casino cash “can technically push them over the limit” for a quarterly profit, said stock analyst Efraim Levy at CFRA. That may cheer some Tesla enthusiasts, he said, but “other investors will say let’s exclude the one-time items from the total” and see how sustainable its profits appear to be.
Tesla could use some positive news as it struggles to produce its make-or-break product, the Model 3 sedan. Problems inside Tesla’s auto assembly plant in Fremont are so severe that the company has installed a third assembly line underneath a temporary tent-like structure. Partially built Model 3s are forklifted from the building and sent through the tent.
Musk has pledged to reach a production rate of 5,000 Model 3s a week by the end of June, although he has not said whether that’s sustainable.
Analysts say the company must raise billions of dollars by next year to survive, which could prove difficult for Musk if the losses continue.
That’s why Musk’s pledge to deliver two profitable quarters this year puts the company under heavy pressure to perform. Earlier this month, Tesla announced the layoff of 3,600 workers, 9% of its workforce, which should reduce costs.
The Nevada tax credits are part of a “kitchen sink” of items Tesla may use to score a quarterly profit, according to Levy. That also includes revenue from sale of zero-emission credits Tesla receives from the state of California as part of an air cleanup program. The company has booked more than $1 billion in such credits since 2014.The Nevada tax credits are issued as Tesla hits benchmarks in capital spending and in hiring Nevada-resident workers.
In its filings with the Securities and Exchange Commission, Tesla has never revealed exactly how much of the credits it applied in any given quarter, either as a reduction in operating expenses or an increase in capital assets. In its annual reports, the company uses general terms to describe when credit cash is posted. “We record these credits as earned when we have evidence there is a market for their sale,” Tesla said in its 2017 10-K report.
The first $20 million were sold to MGM Resorts International, according to reports in the Las Vegas Review-Journal and the ThisIsReno news site. Since then, the buyers have been kept secret, but state records show all of Tesla’s credit sales have been bought by casinos to lower their monthly gaming revenue tax. MGM had no comment.
There is always an active market in transferable tax credits, issued by many states and local governments to encourage economic development. They are typically sold at a discount of 85 to 95 cents on the dollar. Purchasers use them to lower their corporate tax liabilities.
A company has leeway when it accounts for them, said Justin Hibbard, a forensic accountant at Code Accounting in San Francisco who helped The Times analyze the numbers.
Tesla is being “fairly vague” on timing, Hibbard said, but “it is absolutely up to management’s judgment and discretion and up to their auditor’s discretion.”
In Nevada’s case, when casinos use the credits they bought from Tesla, the money comes out of the state’s budget.
Budget officials had expected a $61.1 million surplus for the fiscal year. But according to Nevada’s Legislative Counsel Bureau, which advises lawmakers on budget matters, Tesla sold credits faster than the state expected, reducing the surplus to $18.4 million.
While that’s unpleasant news, “there’s no over-amount of concern” in the state about the surplus reduction, said Mike Willden, chief of staff for Nevada Gov. Brian Sandoval, who pushed the Tesla incentive package. The state’s finances are healthy, and revenue from other sources shows signs of adding to the budget surplus, he said.
But Nevada State Treasurer Dan Schwartz, like Sandoval a Republican, called the tax credits and casino tax breaks “money the citizens have to make up for if they want to build roads, hospitals, and schools.”
Schwartz, who lost a recent primary bid for the governor’s seat, feuded with Sandoval late in 2016 over big tax breaks handed to another electric-car company, Gardena-based Faraday Future. That happened after Schwartz took a trip to China and investigated Faraday investors. He concluded the company could not make good on its promise to build a factory near Las Vegas and withheld incentive money from Faraday.
Faraday subsequently fell into financial difficulty, and the factory was never built. The company, a shell of its former self, is struggling to build cars at a converted tire plant in the Central Valley.
Schwartz said he is no foe of Tesla’s. “Tesla has done nothing wrong” in taking advantage of the incentive program, he said. But he also is no fan of tax incentives, for sports teams or for companies.
“Reno right now is undergoing a real growth spurt” since Tesla brought in about 6,000 new employees, Schwartz said. “People are complaining. Housing prices are up. They don’t have enough money for the infrastructure. I am just kind of opposed to these kind of incentives. Especially if they are selling credits to casinos. That’s real money.”
Sandoval and other supporters counter that jobs and new companies attracted by a successful Tesla will more than make up for money lost through subsidies.
The company spokesman said, “Tesla only receives these incentives if it performs, as they are tied to Tesla spending a minimum of $3.5 billion and creating thousands of jobs, which is precisely what we are doing. If Tesla executes, both Nevada and Tesla share the upside, and if it does not, only Tesla suffers the downside.”