Gross receipts tax: What it is, how it works and how to calculate it
- Gross receipts taxes are state-level taxes on your business’s total incoming cash flow, generally without any deductions for business expenses.
- Eight states currently collect gross receipts taxes: Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, Virginia and Washington.
- If you do business in any of these states, even if you have no physical presence there, you may owe gross receipts taxes, so talk to your tax advisor to understand your exposure.
Business owners are sometimes surprised to find out their company may be subject to a tax on gross receipts in a particular state — even if they have no property or payroll located in the state, or even if their company has no federal taxable income. Could this apply to you?
Gross receipts taxes are state-level taxes that apply to your business’s gross sales and other incoming cash flow, with few or no deductions. This means they cover a large tax base and can lead to serious unanticipated tax exposures for unaware companies.
Keep reading to learn more about gross receipts taxes and what they could mean for your business.
What are gross receipts?
Your gross receipts are the total amount of incoming cash received by your business during your accounting year. Crucially, your business expenses are generally not deducted when calculating gross receipts.
What are the top examples of gross receipts?
Gross receipts measure your total incoming cash flow. This includes any revenue from goods or services that your company is in the business of selling, as well as any additional sources of incoming dollars that may not come from items that your company sells as part of a regular trade or business.
Examples of gross receipts include:
- Revenue from goods sold
- Revenue from services sold
- Revenue from assets sold
- Tax refunds
- Interest earned
- Rental income
- Royalties
- Licensing fees
What are gross receipts taxes?
A gross receipts tax is a tax on your total gross receipts during a given accounting year. Gross receipts taxes generally do not allow deductions for business expenses, such as costs of goods sold and wages.
Gross receipts tax versus sales tax
A sales tax is a tax on a transaction that is owed by the consumer and collected by the seller at the time of sale. A gross receipts tax is owed by the seller or the business receiving nonsales income.
For example, your business may need to pay a gross receipts tax on a sale where it also collects a sales tax from the buyer, or even where it is not required to collect sales tax from the buyer (such as on wholesale sales).
Gross receipts tax versus income tax
A gross receipts tax generally does not allow you to deduct your business expenses. A corporate income tax does, which means you are being taxed only on profits rather than on total incoming cash flow.
Additional considerations
Gross receipts taxes apply to a much larger tax base (gross sales and other incoming cash flow) than corporate income taxes (taxable income minus expenses) or sales taxes (taxable sales). Therefore, states can levy these taxes at much lower rates to raise equivalent revenue.
Gross receipts taxes are also not subject to P.L. 86-272, which is a federal law that limits the ability of states to impose a net income tax on an out-of-state company that has activities limited to the solicitation of sales of tangible personal property. If your company sells tangible personal property and has no employees or property in a particular state, it might still be subject to a gross receipts tax in that state— even though the state cannot impose an income tax on your company.
What is excluded from gross receipts?
Because gross receipts generally include all incoming cash flow, there are not necessarily any income sources that are excluded from a gross receipts tax. However, gross receipts taxes are imposed at the state level (the federal government doesn’t have one), so the rules may vary slightly from state to state.
Which states have state-level gross receipts taxes?
Eight states currently collect gross receipts taxes: Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, Virginia and Washington. Each state administers its tax independently of the others, under its own set of rules.
Who needs to pay gross receipts taxes?
If you do business in a state with a gross receipts tax, you likely need to pay the tax. Talk to your tax advisor to discuss your specific business circumstances and evaluate your tax exposure.
What industries are commonly affected?
A gross receipts tax is industry-agnostic, meaning it affects businesses regardless of sector, though some states’ gross receipts taxes (e.g., Tennessee and Washington) apply at different rates depending upon the business’s industry. A gross receipts tax could impact businesses:
- Selling goods, products, services or property.
- Earning investment or rental income.
- Collecting licensing fees or royalties.
- Qualifying for refundable tax credits.
How to calculate gross receipts taxes
Gross receipts taxes are calculated as a percentage of your business’s gross receipts sourced to the taxing state. To determine your exposure, calculate your state-sourced gross receipts for a given accounting year and assess in light of gross receipts tax rates and policies for any states where you do business.
This can quickly get complicated, so typically you’ll want to work with an experienced tax advisor to understand if and to what extent you are subject to paying gross receipts taxes.
Common challenges businesses face
Business owners often dislike gross receipts taxes because they create certain challenges that other types of taxes don’t. These can include the tax pyramiding effect and a negative impact on high-revenue, low-margin businesses.
Tax pyramiding often (but not always) occurs because a gross receipts tax can be assessed on a business that purchases and resells a good or service, and then the final consumer of that item is also taxed. High-revenue, low-margin businesses (such as grocery stores, discount retailers and logistics companies) are negatively impacted by gross receipts taxes because unlike an income tax or sales tax, a gross receipts tax is assessed on gross sales, not taxable income or taxable sales.
If your company is in a loss position and/or is not required to collect sales tax (e.g., it is a wholesaler), you still need to be aware of gross receipts taxes.
Tips to manage gross receipts tax
To successfully navigate any gross receipts taxes you may be exposed to, talk to your tax advisor. If you do business in more than one state with a gross receipts tax, you may also need to make state-specific adjustments.
Talk to your tax advisor
Tax rules quickly get complicated. Your tax advisor can help you understand if and how you may be affected by gross receipt taxes, limit your exposure where possible and guide you through the process of complying with your tax obligations.
Be aware of state-specific considerations
There are many nuances and state-specific considerations involved with gross receipts taxes. Consider examples like:
- The question of how a sale should be sourced when it temporarily comes to rest in a warehouse before being shipped to its ultimate destination in another state has been hotly contested in Ohio. If your business model involves the temporary storage of goods in a warehouse, the proper sourcing of those receipts should be analyzed.
- All states have penalties for late filing or not filing most taxes, but Oregon has a particularly steep penalty regarding its Corporate Activity Tax (CAT). A 100% late payment and late filing penalty is possible if the CAT return is not filed for three consecutive years. This means your company could be facing a large exposure if it were unaware of this tax that came into existence in 2020.
How Wipfli can help
We advise businesses, organizations and individuals on tax strategies, including how to navigate state and local tax rules like gross receipts taxes. Let’s talk about your specific needs and how we can help. Start a conversation.
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