Many states have balanced budget requirements, so they can’t spend more than what they collect in revenue. To help keep a balanced budget, some states have looked to gross receipts taxes (GRT) to support and increase their tax revenues.
Why? Gross receipts taxes aren’t based on or determined by a company’s net taxable income. So, if the company has losses, it still has to pay a gross receipts tax.
It’s a way for states to guarantee revenue and satisfy their balanced budget requirement.
What’s a gross receipts tax?
Gross receipts are your total revenue without subtracting returns or discounts, operating expenses, or unpaid invoices. It’s strictly the total amount of revenue your business collects in a tax year.
Some states charge a tax on the total gross receipts that companies report. For example, if your business collects $1 million in revenue in 2019, a state may impose a .26% tax rate on it. You must pay $2,600 to the state.
Which states have a gross receipts tax?
Currently, there are six states with a GRT.
What are the states’ gross receipts taxes?
The following table represents a simplified version of each state’s tax policy.
|State||Gross Receipts Tax Name||Gross Receipts Tax Liability|
|Delaware||Gross Receipts Tax||Between .0945% and 1.9914% of gross receipts depending on your business’ activity|
|Nevada||Commerce Tax||Between .051% and .331% of gross receipts depending on your business’ NAICS code|
|Ohio||Commercial Activity Tax||$150 if gross receipts are between $150,000 and $1 million|
$800 + ((total gross receipts – $1 million) x 0.26% of taxable gross receipts) if gross receipts are between $1 million and $2 million
$2,100 + ((total gross receipts – $1 million) x 0.26% of taxable gross receipts) if gross receipts are between $2 million and $4 million
$2,600 + ((total gross receipts – $1 million) x 0.26% of taxable gross receipts) if gross receipts are more than $4 million
|Oregon||Corporate Activity Tax||($250 + 0.57% of taxable commercial activity) – 35% of cost inputs or labor costs|
|Texas||Franchise Tax||Between .375% and .75% depending on your business’ industry and if your total revenue is more than $1.13 million|
|Washington||Business & Occupation Tax||Between .471% and 3.3% depending on your business’ classification and if you have a physical presence in the state, have more than $285,000 in gross receipts, or 25% of gross receipts are sourced in Washington|
How do their GRTs work?
Click on a state below to learn more about its gross receipts tax policy, which entities are required to pay the tax, how each state defines nexus, and how to calculate your tax liability.
Keep in mind, each state sets its own nexus definition, which is a company’s connection to the state.
Delaware’s gross receipts tax rates range between .0945% and 1.9914% depending on your business activity. Generally, the GRT applies to any business that sells goods or provides services in the state.
And, you’re not allowed to deduct the cost of goods or property sold, labor costs, discounts, or related items to reduce your receipts and, therefore, your tax liability.
If you earn income from multiple types of business activities, you must report the gross receipts tax separately for each activity. In addition, the type of activity determines whether you report and pay the GRT monthly or quarterly.
Nevada’s gross receipts tax has been alive and well since 2015, and it’s known as the Commerce Tax. Business entities with Nevada gross revenues greater than $4 million in a taxable year are required to file the Commerce Tax return and pay the tax.
The list of entities subject to the tax includes banks, joint ventures, S and C corporations, partnerships, sole proprietorships, independent contractors, LLCs, and more. Passive entities, credit unions, governmental entities, and nonprofits are among the list of entities exempt from the Commerce Tax.
If your business is located outside of Nevada, you have to meet the $4 million revenue minimum and have a minimum connection. A minimum connection could be as simple as delivering goods or conducting a training class in the state.
You can use the state’s questionnaire to help you figure out if you have a minimum connection to the state. If you answer Yes to any of the questions in Part 1, you have to register for Commerce Tax.
Commerce Tax rates are based on your business’ NAICS industry code. The rates range from .051% to .331%.
Once you’ve identified your NAICS code and your tax rate, you deduct $4 million from your total gross receipts and multiply that number by your tax rate.
The return and payment are due annually – 45 days after the state’s June 30 fiscal year-end.
Ohio’s gross receipts tax is known as the Commercial Activity Tax (CAT)and has been in place since 2005.
Companies with more than $150,000 in Ohio revenue must pay the tax. It applies to all types of entities – sole proprietorships, partnerships, limited liability companies, and corporations – who have substantial nexus in Ohio.
What’s substantial nexus? A business:
- Owns or uses a part or all its capital in Ohio
- Holds a certificate of compliance with Ohio laws authorizing it to do business in Ohio
- Has “bright-line presence” in Ohio which means it:
- has at least $500,000 in taxable gross receipts in Ohio during the calendar year
- has at least $50,000 in property in Ohio at any time during the calendar year
- has at least $50,000 of payroll in Ohio during the calendar year
- has at least 25% of total property, payroll, or gross receipts within Ohio at any time in the calendar year
- resides in Ohio as an individual or for corporate, commercial, or other business purposes.
If your business is located outside of Ohio, in Ohio, or if you’ve got enough business contacts within the state, you have to pay the GRT. However, certain financial institutions, public utility companies, nonprofits, and insurance companies are exempt.
If you meet the substantial nexus and revenue thresholds, you pay an annual minimum tax. If you have more than $1 million in gross receipts, you also have to pay a 0.26% tax on the gross receipts that are greater than $1 million after subtracting the first $1 million for a calendar year.
Let’s use an example. Say you have $3 million in taxable gross receipts. You pay $2,100 for your annual minimum tax. You subtract your first $1 million from your $3 million for a total of $2 million. Multiply the $2 million by 0.26%, and it equals $5,200 in gross receipts tax. For this calendar year, you pay a total of $7,300 to Ohio in gross receipts tax.
The annual minimum tax payments are outlined in the table above for the various gross receipts ranges. You can apply some credits against the CAT.
Businesses with gross receipts between $150,000 and $1 million only pay the annual minimum tax. Businesses with gross receipts greater than $1 million must pay the annual minimum tax and make estimated quarterly payments.
Oregon is the most recent state to adopt a gross receipts tax. It’s known as the Corporate Activity Tax (CAT) and applies to tax years that begin on or after Jan. 1, 2020.
Companies with more than $1 million in revenues must pay the tax. It applies to all business types – C and S corporations, individuals, partnerships, trusts, estates, and limited liability companies. Governmental entities, nonprofits, hospitals, and long-term care facilities are excluded from the tax.
Businesses with nexus in Oregon must pay $250 plus 0.57% of their taxable commercial activity (their Oregon-sourced gross receipts), minus 35% of their cost inputs or labor costs allocated to Oregon.
Cost inputs are the cost of goods sold under the Internal Revenue Code, Section 471. Labor costs are the total compensation of all employees, excluding any compensation that’s more than $500,000 for a single employee. Companies can subtract 35% of whichever of these is greater.
Companies have nexus if they have at least $50,000 in Oregon payroll or property, $750,000 in Oregon sales, or if they have at least 25% of their total payroll, property, or sales in the state.
If companies have at least $750,000 in Oregon sales, they’re supposed to register with the Department of Revenue, but they won’t have to pay a gross receipts tax until they hit $1 million in Oregon revenues.
Some gross receipts are excluded from the law, such as interest income, so it may be helpful to review what’s excluded with a tax professional. If this tax applies to you, you must file your taxes annually and make estimated quarterly payments.
Texas’ gross receipt tax is known as the Franchise Tax. It may change soon as they’ve proposed changing the nexus to an economic nexus threshold of $500,000 in gross receipts due to the Wayfair ruling.
Currently, taxable entities that form or organize in Texas or do business in Texas have to pay the tax.
Partnerships, LLCs, corporations, business trusts, and holding companies are among the list of taxable entities required to pay the tax. Sole proprietorships, unincorporated political committees, and certain passive entities are some of the exemptions.
But, ‘doing business’ in Texas has a broad definition. It can include advertising, making deliveries, or even having a phone number that’s answered in Texas.
If your total revenue is less than $1.13 million, you don’t have to pay the franchise tax.
The franchise tax you pay is based on your margin. You can calculate your margin in four ways – take your total revenue and deduct the cost of goods sold, wages paid to employees, $1 million, or multiply it by 70%. Your total revenue should match the revenue you report on your federal income tax return minus the exclusions.
Then, you allocate your gross receipts to Texas to help calculate your taxable margin. Finally, you must apply a tax rate to your taxable margin, which is based on your business’ industry. If you’re in retail or a wholesaler, your rate is .375%. All other industries pay .75%. If you need a visual aid, check out their calculation worksheet.
Texas’ franchise tax calculation is a little more complex. It may be worthwhile to consult a tax professional, especially if the nexus definition changes.
Washington’s gross receipts tax is the Business & Occupation (B&O) Tax. It’s based on the value of products, gross proceeds of sales, or gross income of a business.
It applies to all businesses with a physical presence in the state. If your business doesn’t have a physical presence in the state, then you must meet one of these thresholds:
- Have more than $285,000 of gross receipts sourced or attributed to Washington in 2018 or 2019
- Have at least 25% of total yearly gross receipts sourced or attributed to Washington in 2018 or 2019
It’s important to note that these nexus thresholds are set to change on Jan. 1, 2020. On that date, the nexus threshold will be a physical presence OR $100,000 of combined gross receipts per calendar year. Again, Washington is changing its nexus due to the Supreme Court’s decision in the South Dakota v. Wayfair, Inc. ruling.
If you had nexus in Washington in a previous year, you’re required to pay B&O tax on all of your Washington receipts in the current year. If you didn’t, you only have to pay B&O tax on the amounts you received after you exceeded the nexus threshold.
Say your business didn’t have nexus in 2018, but you have $300,000 in gross receipts in 2019. You pay B&O tax on $15,000, the amount of receipts that exceed the $285,000 threshold.
What’s your B&O tax rate? Similar to Texas and Nevada’s system, your tax rate is based on your business classification. If you’re part of the four major classifications – retail, wholesale, manufacturing, or service and other activities – your tax rate can range from 0.471% to 1.5%.
If your business falls within the specialized classifications, your tax rate can range from 0.13% to 3.3%.
You can’t claim deductions on the tax, but you can apply up to five credits based on business activity.
Why do I need to pay attention to GRTs?
Many states are reviewing their economic nexus thresholds after the recent Supreme Court decision that allowed states to require businesses to collect and remit sales tax even if the business doesn’t have a physical presence in the state.
States are viewing this as an opportunity to establish new nexus standards so they can generate more revenue. And again, GRTs are one tactic states use to bring in additional revenue.
If you do business in other states, and as states change their tax laws, you could have a tax liability in some states and not realize it. This could mean fines. Fines for failing to file and failing to pay. Yikes.
So, do you owe any gross receipts tax? With some states – like Washington – poised to change their nexus, could you in just a few months? If you’re unsure, it’s time to call a state and local tax professional.
Our state and local tax experts can analyze your tax exposure and recommend solutions if you haven’t been paying your gross receipts tax. Plus, we’re able to tell you where you need to start paying GRT and how to register, so you can stay ahead of the states. Otherwise, you could face notices and penalties.
Have questions about gross receipts taxes? Let’s talk!