Gross Receipts Tax and Other Indirect

Frequently we have helped businesses that may have a good grasp on sales and use tax. They are registered for sales tax in their nexus states, they understand the taxability of their products and services, they collect exemption certificates from their customers, and may even utilize a use tax process for their purchases. However, these same businesses are often surprised by another type of tax obligation they may not be aware of: gross receipts tax (“GRT”).

What is a GRT?

Unlike sales tax, GRT is imposed on the business’ receipt activity, or sales, in a state. While sales tax is considered a trustee tax where a business is responsible for collecting sales tax from their buyers and remitting collected tax to the state, GRT is simply imposed on the sales, or receipts, of the business in the state. GRT is directly imposed on the business’s receipts and cannot be passed to and collected from customers the way sales tax is.

Corporate Income Tax Vs. GRT

It is important to differentiate state corporate income tax from GRT. GRT is imposed on the sales of the business, typically without (or few) business operations and expense deductions often allowed for state corporate income tax filing. It can also be imposed on businesses regardless if they are a corporation or not. Also, it generally does not face the same level of legal complexity as corporate income tax when it comes to the application of nexus in a state. It is a simplified tax levied on business sales.

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    Which States Have GRT?

    Not every state has a GRT. Of those that do, each has different regulations on when, and if, the tax is applicable. Currently, the states that have a GRT or similar types are:

    • Delaware
    • Nevada (Commerce Tax)
    • Ohio (Commercial Activity Tax or CAT)
    • Oregon (Corporate Activity Tax or CAT)
    • Tennessee (Business Tax)
    • Washington (Business and Occupation Tax or B&O)

    Although Hawaii imposes a gross receipts tax called general excise tax (“GET”), businesses are generally allowed to pass the tax on to buyers similar to sales tax and can even impose a higher rate on these transactions to capture the margin, effectively making the tax a no cost to the business. New Mexico is similar; the state imposes a gross receipts tax that businesses can pass on to consumers.

    In addition to the above, some cities also impose their own gross receipts tax:

    • Los Angeles (LA Business Tax or LABT)
    • San Francisco
    • Philidelphia (Business Income and Receipts Tax or BRIT)
    • Portland
    • Over 40 individual localities in Washington impose B&O

    Other Taxes Business Should be Aware of

    Several states have franchise taxes that can be similar to corporate income tax or GRT but is a separate level of tax altogether.  Texas, for example, has a franchise tax, but there is debate on whether it is an income tax or a gross receipts tax based on how it is calculated, which is based on what they define as the “margin.” Each state that imposes a franchise tax has different rules on what business entities are required to file them and on what exactly the calculation is based on. Additionally, some states may only have a franchise tax that functions as a corporate income tax while others impose both a franchise and a corporate income tax.

    States that have franchise taxes are:

    Other types of taxes exist such as annual/biannual business reporting requirements and business license taxes that can exist not only on a state level but a city and county level as well. There are also industry-specific taxes such as alcohol,  tobacco, motor vehicle and petroleum taxes to be aware of if you operate in such industries. Many states have different types of reportings and taxes and it is important to understand what your business requirements are. We have found some businesses to have only a fundamental understanding of these taxes since they are indirect and can lead to a lot of confusion as to what tax obligations a business may have. We work together with your CPA, tax director or CFO to help determine your business compliance needs. For more information please contact us at info@pmbusinessadvisors.com