States That Impose a Gross Receipts Tax and How They Do It
This tax might be experiencing a new surge in popularity
A gross receipt tax (GRT) is a state tax on the gross sales of a business. States often impose a gross receipts tax in lieu of a corporate income tax or sales tax. It's sometimes referred to as a gross excise tax and it's usually passed through to the consumer in the way of higher prices. When a retailer knows this tax is looming on the horizon, a $6 bag of coffee might be priced at $6.25.
Gross receipts taxes might look like sales taxes at first glance, but they tax the sellers, not the retail buyers, at least directly. They're imposed at several levels and even between businesses in the purchase of raw materials, supplies, and transportation.
The Tax Foundation has said that these taxes "create an extra layer of taxation at each stage of production that sales and other taxes do not—something economists call 'tax pyramiding'.”
How Is a Gross Receipts Tax Different From a VAT Tax?
You might have heard of the value-added (VAT) tax that can be imposed on all the steps in the process of making, distributing, and selling a product. The consumer pays the VAT tax but the businesses along the way can get their portion of the tax refunded. So, unlike the gross receipts tax, the VAT tax isn't really a tax on businesses but on consumers.
How Does Gross Receipts Tax Differ From Income Taxes or Franchise Taxes?
Some states tax the incomes of businesses, but in most cases that taxable income is net income—sales minus expenses. The gross receipts tax doesn't deduct expenses.
Other states have franchise taxes, which are similar to income taxes.
How Does a Gross Receipts Tax Work?
Each state that has a GRT decides individually what receipts are included or not included in the calculation. Here are some examples from a few of the states that have a gross receipt or similar tax.
- Delaware's Division of Revenue imposes a gross receipts tax on the "total receipts of a business received from goods sold and services rendered in the State. There are no deductions for the cost of goods or property sold, labor costs, interest expense, discount paid, delivery costs, state or federal taxes, or any other expenses allowed."
- Ohio has a Commercial Activity Tax which is basically a gross receipts tax on all businesses. There is an annual minimum tax based on the amount of taxable gross receipts. The state issues a long, detailed list of receipts that are and aren't included, but basically taxable gross receipts include sales of property—including intellectual property—as well as performance of services and rents.
- Washington has a Business and Occupational Tax on business gross income. Gross income is the "income earned by the business for products sold or services rendered." This includes retail sales. "There are no deductions allowed for costs of doing business, materials used, labor or delivery expenses, or taxes."
The Status of Other States
This is not a popular tax, and only two other states imposed some form of a gross receipts tax as of 2017: Nevada and Texas. But the legislation has been pending in four other states to introduce such a tax, indicating that the gross receipts tax might be making a bit of a comeback after largely being dropped in recent years. These states include Oregon, Oklahoma, Louisiana, and West Virginia.
Some states allow some deductions from the gross receipts tax and some types of businesses may be exempt from these taxes. Check your state's Department of Revenue for more information about your particular state, including pending and passed legislation.