What is the Gross Receipts Tax and How Does It Affect Your Business?

The Gross Receipts Tax (GRT) is a tax levied on a company’s total revenue, regardless of operating costs or business expenses. Unlike corporate income tax, which is based on net profits, the GRT applies to a company’s gross revenue without deductions for the cost of goods sold or employee compensation.

As several states in the United States adopt the Gross Receipts Tax as a means of revenue generation, it is essential for businesses to understand how this tax works and how it may impact their profitability.

This blog dives into the specifics of the Gross Receipts Tax, how it functions, which states impose it, and how it can impact your business. We also explore the differences between the GRT and other business taxes and provide tips on how to prepare your business for this tax.

1. What is the Gross Receipts Tax?

The Gross Receipts Tax (GRT) is a direct tax on the total revenue generated by a business, with no deductions for operating expenses, costs of goods sold, or employee salaries. It is imposed at the state or local level and is based solely on the company’s gross revenue, or the total value of sales made during a specific period.

Key Features of the Gross Receipts Tax:

• Tax on Gross Revenue: The tax is levied on total revenue, regardless of the expenses and costs incurred by the business.
• Applies to All Sales: Both the sale of goods and services are subject to the GRT, which may include revenue from local, national, and even international sales, depending on the jurisdiction.
• No Deductions Allowed: Unlike income tax, the GRT does not allow for deductions of business expenses such as materials, payroll, or supplies, significantly increasing a company’s tax burden.

2. How Does the Gross Receipts Tax Work?

The Gross Receipts Tax is calculated as a fixed percentage of a company’s total revenue before any deductions or expenses. Each state that implements the GRT sets its own tax rate, which may vary by jurisdiction and type of business. The rates are generally low (typically less than 1%), but because the tax is applied to gross rather than net income, the impact on a business’s profitability can be substantial.

Example of Gross Receipts Tax Calculation:

‍Suppose a business has $500,000 in gross revenue in a state where the GRT rate is 0.5%. The calculation would be:

• Gross Revenue: $500,000
• GRT Rate: 0.5%
• Total Tax Owed: $500,000 x 0.5% = $2,500

This tax must be paid even if the company incurs losses during the fiscal year, as it is based solely on gross revenue.

3. Which States Impose the Gross Receipts Tax?

Not all U.S. states impose the Gross Receipts Tax. Some have adopted the GRT as an alternative revenue source, while others use more traditional taxes like corporate income tax or Sales Tax.

States That Impose the Gross Receipts Tax:

• New Mexico: Known for its Gross Receipts Tax, which applies to nearly all sales of goods and services. Rates vary from 5.125% to 9.4375%, depending on the location.
• Delaware: The state does not have a sales tax but applies a Gross Receipts Tax ranging from 0.0945% to 1.9914%, depending on the type of business.
• Oregon: Introduced the Corporate Activity Tax (CAT) in 2020, a form of GRT applied to businesses with gross revenue exceeding $1 million.
• Ohio: The Commercial Activity Tax (CAT) is another GRT variant. If sales are below $3 million in 2024 and below $6 million in 2025, filing is not required. If sales exceed these amounts, filings will be quarterly.
• Tennessee: Applies the GRT to specific industries, such as telecommunications and energy.

4. How Does the Gross Receipts Tax Affect Your Business?

The Gross Receipts Tax can significantly impact your business’s profitability, especially if you operate in a sector with low-profit margins. Since this tax is applied to gross revenue and does not allow for operational cost deductions, companies with high operating expenses could be severely affected.

Key Impacts of the GRT on Your Business:

1. Increased Tax Burden: For businesses with low profit margins, the GRT may represent a larger portion of net income compared to traditional taxes, resulting in a higher tax burden.
2. Discourages Expansion: Companies operating in multiple jurisdictions with the GRT may face additional taxes in each location, discouraging local or regional expansion.
3. Higher Product and Service Costs: Since the GRT applies at every stage of the supply chain, businesses often pass these costs on to consumers through higher prices, potentially affecting market competitiveness.
4. Lack of Incentives to Reduce Costs: Because the GRT does not allow for expense deductions, businesses have few fiscal incentives to cut operating costs or improve efficiency.

5. Differences Between the Gross Receipts Tax and Other Business Taxes

The Gross Receipts Tax differs from other business taxes in that it focuses on gross rather than net income. Here are the main differences between the GRT and other taxes:

Gross Receipts Tax vs. Corporate Income Tax

• Corporate Income Tax: Calculated on net profits, after deducting all business costs and expenses. The GRT, on the other hand, is applied to gross revenue without allowing deductions.

Gross Receipts Tax vs. Sales Tax

• Sales Tax: Only applies to final sales to the consumer. The GRT, however, applies at every stage of production and sale, potentially causing a cascading effect, where the tax is levied multiple times throughout the production and distribution process.

6. How to Prepare for the Gross Receipts Tax in Your Business

If you operate in a state that imposes the Gross Receipts Tax, financial planning is crucial to manage this tax effectively. Here are some tips to prepare:

• Evaluate Your Profit Margins: Understanding the impact of the GRT on your margins is essential. If you operate in a low-margin industry, adjust your prices or operational costs to mitigate the tax burden.
• Work with Professionals: Given the complexity of the U.S. tax system, having the support of a tax advisor who specializes in LLCs and understands state and federal tax regulations is critical. We can guide you on the best tax structure for your business, optimize your tax burden, and ensure compliance with all tax laws. From managing the GRT to other tax obligations, we help protect your profitability and avoid issues with the IRS.
• Optimize Your Operations: Since the GRT does not allow for deductions, optimizing operations to reduce costs will be crucial for maintaining manageable cost structures.

Conclusion

The Gross Receipts Tax is a tax that affects businesses in several U.S. states, applied to gross revenue without allowing deductions. While it can be challenging for businesses with low margins, proper planning and understanding of its implications can help mitigate the GRT’s effects and maintain profitability.

If you need tax advice to understand how the GRT affects your business and how to comply with tax obligations, contact us. We’ll help you plan and manage this tax effectively.