As the name suggests, a gross receipts tax (“GRT”) is a tax on business receipts rather than business income. Typically, it is imposed on all business sales and allows few or no deductions—and may be used against out-of-state businesses with even a de minimis nexus to the state issuing GRT tax bills.
A GRT by any other name is still a gross receipts tax (“GRT”)– and it goes by a number of different names in the various states that have enacted it. Ohio calls its GRT the commercial activity tax, or CAT, Texas calls the state GRT a franchise tax or margin tax, Washington named its GRT the Business and Occupation Tax, and Nevada’s GRT is the Commerce Tax.
Just over a decade ago, gross receipts taxes appeared on the verge of extinction, with the antiquated form of taxation persisting (at the state level) only in Delaware and Washington. In recent years, however, several states have turned to this highly non-neutral tax, chiefly as an alternative to volatile corporate income taxes. Ohio, Texas, and Nevada all adopted gross receipts taxes in recent years, while several states, including California, Louisiana, Missouri, Oklahoma, Oregon, Pennsylvania, West Virginia, and Wyoming contemplated their adoption in 2017. GRT proposals in Virginia and other states may be expected in coming years, as revenue pressures driving their reemergence have not abated.
Although Nevada, Ohio, Texas, and Washington forgo corporate income taxes their gross receipts taxes on businesses, is generally thought to be more economically harmful due to tax pyramiding and non-transparency. Because gross receipts taxes are imposed at intermediate stages of production and do not allow deductions for costs, they are not based on profits or net income (like a corporate income tax) or final consumption (like a well-constructed sales tax). They provide an advantage to businesses with high profit margins or considerable vertical integration, while they penalize companies with narrow margins or multiple transacted stages of production.
This trend is concerning—particularly for Virginia businesses engaging with, selling to, or merely traveling through states which have adopted GRTs. The flaws of gross receipts taxes are well documented. Gross receipts taxes lead to higher consumer prices, lower wages, and fewer job opportunities, as the tax pyramids throughout the production cycle.
Why are states considering a gross receipts tax, given the noted flaws? Gross receipts taxes have two main benefits: They produce large and stable amounts of revenue. The same product is taxed multiple times as it moves to the market. And, since gross receipts taxes are assessed on sales, not income, they are not as volatile. Under a corporate income tax, companies do not pay the tax if their profits are zero or negative. The same is not true of a gross receipts tax.
GRTs to Watch For:
Ohio Commercial Activity Tax
Ohio’s GRT is a commercial activity tax (“CAT”) on a business entity’s gross receipts. The CAT is imposed on many entities including C corporations, S corporations, partnerships, and limited liability companies. Certain types of entities, including financial institutions, insurance companies, securities dealers and public utilities, which are subject to other types of Ohio taxes, are exempt from the CAT. However, this tax explicitly applies to out-of-state trucking and transportation companies—even where such companies only pass through the state of Ohio without picking up or dropping off loads.
Gross receipts subject to CAT are broadly defined to include most business types or receipts from the sale or property or realized in the performance of a service. For services, the receipt is sitused (sourced) to Ohio in the proportion that the purchaser’s benefit in Ohio bears to the purchasher’s benefit everywhere. ORC Ann. § 5751.033.
Gross receipts from the sale of transportation services by a motor carrier shall be sitused to [Ohio] in proportion to the mileage traveled by the carrier during the tax period on roadways, waterways, airways, and railways in [Ohio] to the mileage traveled by the carrier during the tax period on roadways, waterways, airways, and railways everywhere.ORC Ann. § 5751.033(G).
The Ohio Department of Taxation issued a special Rule addressing highway transportation services for purposes of Chapter 5751.
An out-of-state entity is only required to register and pay CAT if that entity has a bright-line presence in Ohio. An entity is deemed to have a “bright-line presence” in Ohio for purposes of CAT if that entity meets one of five tests, one being that the entity has property in Ohio with an aggregate value of at least $50,000 at any time during the calendar year. ORC Ann. § 5751.01.
Application of this property test to highway transportation services is as follows: A person providing highway transportation services will be presumed to have at least $50,000 of property in aggregate during the calendar year if the person has property of such value in Ohio for more than thirteen days, which need not be consecutive. Persons providing highway transportation services must situs gross receipts from such services pursuant to ORC Ann. § 5751.033(G) in proportion to the miles traveled by the carrier during the tax period within the state compared with the miles traveled by the carrier during the tax period everywhere. Even if an entity has a bright-line presence, however, that entity must also have at least $150,000.00 in taxable gross receipts in order to be a taxpayer for purposes of CAT.
For example, ABC Trucking, a Kansas Corporation, transports $100,000 worth of goods to a retailer in Pennsylvania. The total trip is 900 miles, of which two hundred fifteen miles are traveled in Ohio, and ABC charges $10,000 per trip. In this example, assuming ABC meets the bright-line-standard, ABC’s $10,000 of gross receipts would be ‘sitused’ to Ohio on the proportion of miles driven within Ohio compared with total miles drive everywhere.
Taxpayers having over $150,000 in taxable gross receipts ‘sitused’ in Ohio are required to file returns for CAT. CAT also requires registration with the Ohio Department of Taxation as a taxpayer. See https://www.tax.ohio.gov/portals/0/forms/ohio_individual/individual/Nexus_Questionnaire.pdf for Ohio’s Nexus Questionnaire.
Ohio’s Commercial Activity Tax is imposed at a rate of 0.26 percent on business gross receipts in excess of $1 million. Additionally, a tiered minimum tax is imposed on all businesses with taxable gross receipts of $150,000.00 or more, at amounts ranging from $150 for filers less than $1 million in receipts to $2,600 for filers with more than $4 million in receipts. As a gross receipts tax, the CAT is levied on the entirety of a company’s Ohio business receipts, without deductions for compensation, costs of goods sold, or other expenses.
The Ohio Department of Taxation has recently been targeting out of state entities that it has identified as potentially being subject to CAT. The Ohio Supreme Court recently ruled CAT constitutional, where it explored an out-of-state entity’s nexus with Ohio and the constitutionality under the commerce clause of imposing such tax. Crutchfield Corp. v. Testa, 88 N.E.3d 900 (2016). Notably, however, the out-of-state entities which challenged the constitutionality of the CAT were not trucking companies. Thus, leaving the door open for a potential constitutional challenge to be made by out-of-state trucking companies.
Texas Franchise Tax
Texas imposes a GRT in the form of a franchise tax based on a taxpayer’s margin. The tax is imposed on C corporations, S corporations, limited liability companies, partnerships, and other legal entities. Taxable entities that are part of an affiliated group engaged in a unitary business are required to file a combined group report computing their franchise tax as if they were a single taxable entity. See https://comptroller.texas.gov/forms/ap-114.pdf Texas’ economic nexus questionnaire.
There are several nuances specific to the Texas franchise tax computation, most notably:
- Total revenues typically reference amounts reported on the federal income tax return including gross receipts or sales (less returns and allowances), dividends, interest, etc.
- A taxable entity may subtract cost of goods sold in computing its margin only if the entity owns the goods. As a result, service companies are generally not eligible to subtract cost of goods sold.
- No tax is due if the total revenue after revenue exclusions is less than $300,000 (TX Tax Code §171.002(d))
Nevada Commerce Tax
The Nevada commerce tax (“NCT”) applies to companies entities “engaged” in business in Nevada. “Engaging in business” means commencing, conducting or continuing a business, the exercise of corporate or franchise powers regarding a business, and the liquidation of a business which is or was engaging in a business when the liquidator holds itself out to the public as conducting that business.
Each business entity engaged in business in Nevada is required to file the Commerce Tax return regardless of whether there is tax due or not.
For businesses located outside of Nevada, a minimum connection with Nevada is necessary in order for them to be subject to the NCT. Activities that create a nexus sufficient for imposition of the tax include selling, leasing or renting real or personal property in Nevada, providing services while physically present in Nevada, maintaining a place of business or facilities in Nevada, having employees in Nevada, and entering into a contract to be performed in Nevada. Like many states, Nevada has developed a nexus questionnaire to help out-of-state businesses to determine their filing requirements. See https://tax.nv.gov/uploadedFiles/taxnvgov/Content/Commerce/COM_nexus_questionnaire.pdf.
The NCT applies to businesses with more than $4 million in annual gross revenue. But a business is required to file a commerce tax return even if it has no tax liability. The commerce tax rate varies by industry and ranges from .051% to .331%.
Washington Business and Occupation Tax
Washington imposes a GRT called the business and occupation tax (“B&O tax”). The B&O tax applies to different types of entities including C corporations, S corporations, partnerships, and sole proprietorships. The B&O tax is imposed on a seller’s gross receipts derived from business activities conducted in Washington. Generally, no deductions are allowed for cost of goods sold, salaries, supplies, taxes, or any other costs of doing business with the exception of a few exemptions, deductions and credits.
The B&O tax rate varies with the type of business activity. The four major business activity classifications include retailing, wholesaling, manufacturing, and service and other activities. There are also a number of specialized classifications. The applicable tax rates range from 0.471 percent for retailing to 1.5 percent for services and other activities.
Out-of-state businesses making sales into Washington and/or with income attributable to Washington will be subject to the B&O tax if they meet any of the following economic nexus thresholds during either the current or prior calendar year.
A few examples of physical presence nexus-creating activities include, but are not limited to:
- Soliciting sales in this state through employees or other representatives;
- Installing or assembling goods in Washington, either by employees or other representatives;
- Maintaining a stock of goods in Washington;
- Renting or leasing tangible personal property;
- Providing services;
- Constructing, installing, repairing, maintaining real property or tangible personal property in Washington; and
- Making regular deliveries of goods into Washington using the taxpayer’s own vehicles.
Under the economic nexus standard, a person engaging in business in Washington is deemed to have substantial nexus with Washington if the person is:
- An individual and is a resident or domiciliary of Washington;
- A business entity and is organized or commercially domiciled in Washington; or
- A nonresident individual or a business entity that is organized or commercially domiciled outside Washington, and in the immediately preceding tax year the person had:
- More than $53,000 of property in Washington;
- More than $53,000 of payroll in Washington;
- More than $267,000 of receipts from Washington; or
- At least twenty-five percent of the person’s total property, total payroll, or total receipts in Washington.
Furthermore, Washington extended the economic nexus standard to the wholesaling classification:
‘Engaging within this state’ when used in connection with any apportionable activity as defined in RCW 82.04.460 or wholesale sales taxable under RCW 82.04.257(1) or 82.04.270, means that a person generates gross income of the business from sources within this state, such as customers or intangible property located in this state, regardless of whether the person is physically present in this state.
Under this standard, out-of-state businesses making wholesale sales into Washington are subject to the wholesaling B&O tax on wholesale sales delivered to Washington customers if the taxpayers meet any of the above listed economic nexus thresholds. Out-of-state taxpayers that do not have a physical presence in Washington but exceed $267,000.00 receipts in wholesale transactions attributed to Washington within a calendar year are subject to the B&O tax on their Washington sourced wholesale sales. See https://dor.wa.gov/sites/default/files/legacy/Docs/Misc/EconomicNexusWorksheet.xlsm for Washington’s economic nexus worksheet.
Delaware Gross Receipts Tax
Delaware has a franchise tax and a corporation income tax, as well as a tax on limited liability companies, limited partnerships, and general partnerships.
When you engage in business in the State of Delaware, you may be required to pay Gross Receipts Tax. This tax is paid by the seller of goods (tangible or otherwise) or the provider of services in the state. There are no deductions for the cost of goods or property sold, material or labor costs, interest expense, discounts paid, delivery costs, state or federal taxes, or any other expenses allowed. Note that “Wholesale Businesses” may be eligible for exemptions. See https://revenue.delaware.gov/services/nexus.pdf for Delaware’s economic nexus questionnaire.
Delaware’s franchise tax, which is essentially a tax on the privilege of having a Delaware business, applies to traditional corporations (C corporations) and S corporations.
Assessing whether you may owe gross receipts taxes in any of these states should be done with the assistance of a tax professional and an attorney. Please reach out for guidance prior to submitting a nexus questionnaire to any state seeking to charge you gross receipts taxes. If you have questions about this article or related issues, please contact Megan Wagner at 804.377.1275 or email@example.com or Steve Setliff at 804.377.1261 or firstname.lastname@example.org.