Gross receipts taxes are having a renewed focus across the U.S. as a way to raise revenue. They are imposed on a business’ gross proceeds of all sales (taxable and exempt) into a state without any deductions for costs of doing business.Gross receipts taxes also aren’t generally collected from the customer.
The broad application of gross receipts taxes makes them attractive sources of revenue for states and localities. In states without a retail sales tax, the appeal is amplified as a revenue booster.Localities also find gross receipts taxes a lucrative approach to raising revenue on businesses for either general revenue or special purpose needs such as homelessness.
Even though gross receipts taxes are not applied in the same way as sales taxes, the responsibility to manage these hybrid taxes often falls to sales tax professionals. For this reason, sales tax professionals cannot overlook non-sales tax states in determining company nexus and filing obligations.
Here is the 101 knowledge that you need to know to get you acquainted with gross receipts taxes…
What is the definition of a gross receipts tax?
To start off, let’s uncover what exactly it means for a tax to be considered a gross receipts tax. According to Tax Foundation, “A gross receipts tax is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.” So, in short, gross receipts tax is generally levied and assessed against the seller based on the gross proceeds of all sales of tangible personal property and/or services.
There are various types of gross receipts taxes imposed by different levels of government authorities. In some cases, the gross receipts taxes are in lieu of a sales or income tax and in others they are in addition to the sales or income tax. You’ll see gross receipts taxes being associated with sales tax, franchise tax, business & occupation tax, commercial activities tax, and others. This makes it harder to understand the concept and determine your obligations. So, let’s dive into a few of these versions of gross receipts tax to get a better understanding.
Are gross receipts taxes a version of sales tax?
The fact is that gross receipts tax and sales tax are not one and the same. However, there is some overlap between the two. There are some states like Hawaii (General Excise Tax) and Arkansas that call their sales tax a “gross receipts tax”.These taxes are at their heart a “sales tax”.
The imposition of a “gross receipts/sales” tax borrows its concepts almost entirely from the imposition section of the privilege tax. That means that the seller is liable for the tax. If the seller fails to add the tax to the purchaser’s invoice, the seller remains liable.
Key features of the “gross receipts/sales” tax:
- The tax is not required to be shifted to the consumer
- The seller may absorb the tax
- The tax is not required to be separately stated
While we’re at it, there are a few more gross receipts tax types which could have a unique name in different states that are worth clarifying…
The imposition of a “gross receipts/franchise” tax borrows its concepts from both the imposition of a privilege tax and an income tax. It is similar to the privilege tax in that the seller is liable for the tax. However, it’s also like an income tax because the tax is not added to the purchaser’s invoice. These types of taxes might also offer deductions for certain types of costs.
Key features of the “gross receipts/franchise” tax:
- The tax may not be shifted to the consumer as a tax
- The tax is not separately stated
The imposition of a business & occupation (B&O) or commercial activity (CAT) tax is typically on all transactions. This allows for a larger tax base which might otherwise have been exempt from sales and use taxes. The seller is liable for the tax, although it can be passed on to the consumer if that is negotiated and disclosed as an element of the final price.
Key features of the business & occupation tax:
- The tax is not typically shifted to the consumer
- The tax is not required to be separately stated unless negotiated as an element of the final price
Where am I liable for paying gross receipts taxes? Does Nexus apply?
There are gross receipts taxes throughout the United States. There are states that essentially impose a sales tax but call it a gross receipts tax: Hawaii and New Mexico are a few examples. And there are states that impose a more traditional gross receipt tax, where the tax is on a company’s gross receipts: Nevada, Washington, Ohio, Oregon, Tennessee and Texas. And there are some localities that impose gross receipts taxes that may be aligned with either business licenses or special purposes such as Philadelphia, San Francisco, and many cities in Virginia.
Nexus for gross receipts is more like nexus for sales tax. State-level gross receipts have used an economic nexus test since long before the Wayfair decision. They each have their own thresholds for economic nexus for both in-state and out-of-state taxpayers. Local gross receipts taxes, which are more often linked to a business license, historically have required physical presence but some like Philadelphia use an economic nexus test.
The Renewed Focus on Gross Receipts Taxes: Are You Prepared?
There are some states that impose gross receipts taxes on businesses with gross receipts from their operations. And this is just limited to traditional retailers.Businesses with any type of revenue sources are generally subject to some of these gross receipts taxes.In a few states, such as New Mexico and Hawaii, gross receipts taxes function similarly to sales tax. In others, like Washington, Ohio, and Texas, gross receipts taxes blend income and sales tax principles.
Localities are also looking to get a piece of the revenue made possible by gross receipts taxes. San Francisco and Portland have enacted gross receipts taxes in order to fund solutions to social issues. Other cities like Los Angeles have local business licenses that measure the license fee on gross receipts.
