A gross receipt tax is a tax that applies to the total revenue of a business. It is a state or local tax that is collected in several states in the US.
A GRT offers several advantages to tax authorities. However, it also has several practical challenges for tax authorities and taxpayers.
Let us discuss what gross receipt taxes are and how they work.
What is a Gross Receipt Tax?
A gross receipt tax is applied to a business’s total sales or gross receipts. Unlike other taxes, it does not account for the expenses or cost of goods sold for a business.
Gross receipt taxes (GRTs) are applied to revenue sources of a business with every transaction. It means the same tax is applied to a finished product at several stages from raw material to manufacturing and through retailers’ supply chain.
A GRT is a state tax collected by state and local governments across the US. A few selected states such as New Mexico, Texas, Delaware, etc. collect the GRT in its pure form. Many other states have repealed the GRT collection.
Gross receipt taxes are applicable on business-to-business sales as well. Unlike the sales tax from buyers, a GRT is collected from the sellers.
However, businesses may pass on the tax to the consumers knowing they would need to pay it on sales.
What are Gross Receipts?
It is important to understand a business’s gross receipts when applying the GRT. Gross receipts are every income source of a business including sales in cash or property.
The components of gross receipts can include:
- Gross sales of products or services
- Interest earned
- Rental income
- Licensing, patent, or copyrights royalties
- Dividend income received
- Capital gains
- Tax refunds
- Donations received, and so on.
It means gross receipts are different from gross sales. Gross sales only include revenue from sales of products. Unlike gross sales, gross receipts do not account for discounts.
State and local tax authorities may offer their preferred definitions of gross receipts for the tax collection systems.
They may also guide the inclusion or exclusion of certain revenue streams for tax purposes.
How Does Gross Receipt Tax Work?
Each state and local tax authority declares a gross receipt tax rate. State tax authorities also define gross receipts and any relevant inclusions and exclusions for tax calculations.
A GRT is also applicable to business-to-business transactions. From raw material purchases to manufacturing, the GRT will be applicable at every stage.
GRT is currently applicable in the following states with their effective rates.
|Lowest GRT Rate
|Highest GRT Rate
In some states, GRT can also be collected by local governments and municipalities. These local taxes may be named differently.
Each state defines the rules for tax base and allowed expenditures. For instance, Texas allows the deduction for the cost of goods sold before applying the GRT.
Also, each state may have different tax rates for different industries while some states may exempt certain industries from the GRT.
Gross Receipt Tax Vs. Value-Added Tax
Value-added tax is applicable in most jurisdictions in the same way as the GRT. VAT is also levied upon services and products from raw material to manufacturing and from wholesale to the retailer selling phases.
A key distinction between the two taxes is that the VAT is a pass-on tax. Businesses can take a refund for the VAT paid.
It means the cost of VAT is transferred to the end consumer. Also, VAT rules are being transformed so that it is applicable and collected only at the place of consumption of the product/service.
On the other hand, a gross receipt tax is levied upon businesses. It means whenever a business makes sales, it incurs a GRT cost.
The GRT cannot be refunded generally. However, many businesses also pass on the GRT cost to the consumers.
In short, VAT is consumer tax while GRT is business tax.
Gross Receipt Tax Vs. Corporate Income Tax
Corporate income tax is different from the GRT in several. Foremost, income tax is applicable on gross profits after deducting as many expenses as possible (legally).
The GRT applies to gross receipts or all possible income sources.
Businesses can deduct several business expenses such as cost of goods sold, admin, selling, marketing, wages, etc. to reduce their corporate income tax liability.
The tax treatment for both types of taxes also differs. Income tax rates are different depending on the entity structure and type.
For instance, C corporations would have a different tax liability than an LLC with the same gross profits.
Contrarily, gross receipt taxes are applicable on all business sales and most types of businesses. However, some states may offer exemption from GRT to specific industries.
Tax rates for GRT and income tax also differ drastically. For example, as the GRT is applicable on gross sales, it is often a fraction or below 1% while income tax is commonly in double digits.
Special Considerations with Gross Receipt Tax – Arguments For
Gross receipt taxes have broad tax bases as compared to corporate income taxes. It means authorities can collect more revenue through the GRT.
It is also appealing for businesses as the GRT rates are lower than the commonly double-digit income tax rates.
Gross receipt taxes are simple to calculate and collect. Thus, they offer compliance simplicity to businesses as well as tax collecting authorities.
In the broader economic sense, the GRT is also helpful for authorities to increase their revenues. Unlike income taxes that deteriorate with economic recessions or cyclic sales, gross receipt taxes are collected uniformly.
Tax authorities would prefer a simple, inclusive, and stable revenue source in the form of gross receipt tax.
Tax authorities have typically faced difficulties in collecting income taxes with challenges such as volatility, complexity, and tax avoidance.
Businesses can argue in favor of a GRT if they have no double taxation. Also, a GRT applicable to the total revenue means lower income tax. Thus, it helps businesses in a few ways as well.
Challenges with Gross Receipt Tax – Arguments Against
Although GRT is a simple tax and provides stable revenue for tax authorities, it has faced criticism in many ways.
A major drawback of the gross receipt tax is its tax pyramiding effect. It happens when one product is taxed several times during its lifecycle for the same type of tax.
For example, the production of furniture goes through different stages. A GRT is first imposed on the lumber seller, then on the furniture producer, then on the wholesaler, and finally on the retailer. At each phase, GRT applies to all of these businesses.
Impact on Business Profits
Since GRT is imposed on gross receipts, it drastically affects a business’s gross profits. Businesses then try to pass on the costs to consumers.
That further increases their cost of production and reduces their profit margins.
Impact on Consumers
Eventually, the taxpayers are consumers whatever the form of tax may be. Most businesses would pass on the GRT costs to the consumers as well.
Unlike other types of taxes, gross receipt taxes are difficult to separate from other costs. Businesses cannot separately allocate the GRT.
It poses several transparency challenges to businesses and tax authorities even if they can.