Do you know your gross receipts tax exposure?
Many business owners would be surprised to learn their company is subject to a tax on gross sales in several states — even when they had no property or payroll located in the state, and the company had no federal taxable income.
Gross receipts taxes apply to your business’s gross sales, meaning they cover a large tax base and can lead to serious tax exposures for the unaware. Here is the key information you need to help understand what you may owe:
What is gross receipts tax?
A gross receipts tax is a tax applied to a company’s gross sales without deductions for business expenses, such as costs of goods sold and wages. Also, unlike a sales tax (which is owed by the buyer and collected by the seller), a gross receipts tax is owed by the seller.
The following jurisdictions currently have a gross receipts tax in various forms: Delaware (occupational license fees), District of Columbia (ballpark fee), Nevada (commerce tax), Ohio (commercial activity tax), Oregon (corporate activity tax), Tennessee (business tax), Texas (franchise/margin tax), Virginia (business, professional and occupational license tax) and Washington (business and occupation tax).
Tax pyramiding
Gross receipts taxes are frequently regarded as a poor tax policy because of the tax pyramiding effect and negative impact on high-revenue, low-margin businesses.
Tax pyramiding occurs because a gross receipts tax is assessed on a business and then the final consumer purchase 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 receipt taxes because — unlike an income tax or sales tax — a gross receipt tax is assessed on gross sales, not taxable income or taxable sales.
If your company is in a loss position and/or has totally exempt sales, you still need to be aware of gross receipts taxes.
Gross receipts taxes vs. corporate income tax
Gross receipts taxes are different from corporate income taxes and sales taxes in two important ways:
1. Gross receipts taxes apply to a much larger tax base (i.e., gross sales) than corporate income taxes (i.e., taxable income) or sales taxes (i.e., taxable sales). Therefore, states can levy these taxes at much lower rates to raise equivalent revenue.
2. Gross receipts taxes are not subject to P.L. 86-272, which limits the ability of states to impose a net income tax on an out-of-state company whose activities are 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.
State-specific considerations
There are many nuances and state-specific considerations involved with gross receipts taxes.
For example, 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. A 100% late payment and late filing penalty is possible if the corporate activity tax return is not filed for three consecutive years. This means your company could be facing a large exposure if it was unaware that this tax came into existence in 2020.
The Ohio ultimate destination issue and Oregon late filing penalty are just two examples of traps for the unwary regarding gross receipts taxes. To help ensure that your business is prepared for any gross receipts taxes, contact your CPA.
How Wipfli can help
Wipfli’s dedicated state and local tax (SALT) team is ready to help you navigate the latest tax updates. We stay current with regulations and laws to help you understand the potential impacts on your business and adjust your tax planning effectively. Contact us today to learn more about how we can provide you with support for gross receipts taxes and your most pressing SALT concerns.
Sign up to receive additional tax content in your inbox or continue reading:
