Taxes on gross receipts taxes are making a resurgence across the U.S. as a way to raise revenue. Gross receipts taxes are imposed on a business’ gross proceeds of all sales into a state without any deductions for costs of doing business.
The broad application of gross receipts taxes makes them attractive sources of revenue for states and localities. In states without a retail sales tax, the appeal is amplified as a revenue booster.
Two states without a sales tax, Oregon and Delaware, impose gross receipts on companies engaged in business in their state.
Even though gross receipts taxes are not applied in the same way as sales taxes, the responsibility to manage these hybrid taxes often falls to sales tax professionals. For this reason, sales tax professionals cannot overlook non-sales tax states in determining company nexus and filing obligations.
The most recent addition to the list of gross receipts taxes across the country is in Oregon. Oregon enacted its Commercial Activity Tax (CAT) to be effective January 1, 2020. The revenue raised from the tax will be funneled into a “Fund for Student Success” that is expected to raise $1 billion annually for Oregon schools.
The CAT is not a transactional tax like a retail sales tax not is it based on net income like an income tax. Oregon’s CAT is measured on a business’s commercial activity–the total amount a business realizes from transactions and activity in Oregon. Any business or unitary group of businesses (“a group of entities that form a unitary business enterprise in which members share or exchange value”) doing business in Oregon may have CAT obligations – including C and S corps, partnerships, sole proprietorships, and other business entities. Yes – flow through entities that normally don’t pay income tax at the entity level will pay gross receipts taxes at the entity level with no credit to the owners who pay income tax.
The CAT is imposed on “taxable commercial activity” in excess of $1 million at a rate of 0.57%, plus a flat tax of $250. Only taxpayers with more than $1 million of taxable Oregon commercial activity will have a payment obligation.
Most gross receipts taxes apply to a firm’s sales without any deductions for costs of doing business. Oregon, however, does allow for a 35% deduction of the larger of: (a) the amount of cost inputs; or (b) the taxpayer’s labor cost.
Certain types of organizations and items are excluded from the CAT. Exempt entities include but are not limited to nonprofit organizations, certain farmers’ cooperatives, federal, state, and local government entities, and hospitals. Some items excluded from CAT are receipts from motor fuel sales, receipts from wholesale/retail sales of groceries, and certain income items such as dividend or specific types of interest income.
Oregon set four thresholds with corresponding CAT responsibilities based on a business’ commercial activity levels.
|Excluded–No Requirement||Less than $750,000||Business or unitary group with less than $750,000 of Oregon commercial activity are excluded from all CAT requirements.|
|Registration Threshold||$750,000+||Business or unitary group with Oregon commercial activity in excess of $750,000 must register for the CAT.|
|Filing Threshold||$1 Million||Business or unitary group with Oregon commercial activity of $1 million must file a return.|
|Tax Payment Threshold||More than $1 Million||Business or unitary group with taxable Oregon commercial activity in excess of $1 million must file a return and pay tax.|
Source: Corporate Activity Tax FAQ, Oregon Department of Revenue
If your company has a CAT obligation, the registration process is separate from Oregon income tax. Once your company meets the $750,000 registration threshold, you are required to register within 30 days. Failure to do so can result in a penalty of $100 per month, up to $1,000 per calendar year.
The Delaware Gross Receipts Tax is a longstanding tax. Enacted in 1913, the tax is one of the few gross receipts taxes that lasted through the second half of the twentieth century when gross receipts taxes began to fall out of favor due to criticism for being inefficient and harmful.
In states like Oregon that are part of the new resurgence of gross receipts taxes, you can see reflections of the principles of long-established gross receipts taxes.
Like in Oregon, the Delaware gross receipts tax is not a transactional tax levied on consumers. The tax is levied on sellers of goods and services, on their total gross revenues. Gross receipts tax rates currently range from .0945% to .7468% depending on the business activity.
Delaware does not permit 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.
However, most businesses are entitled to an exclusion when determining gross receipts tax due, depending on the business activity. Exclusions generally start at $100,000 per month. Check the Delaware Department of Revenue Tax Tips to determine the exclusion for your specific business activity.
Sales by nonprofit organizations, nonprofit hospitals and healthcare facilities, certain sales to the State of Delaware which are administered by the Department of Administrative Services, and a few other activities are exempt from Delaware gross receipts taxes.
When you engage in business in Delaware, you likely will need to register to pay gross receipts taxes. Business licenses come with an annual fee, usually $75, are valid until December 31, and are renewable for a full year.
Failure to obtain and pay a license fee before engaging in business can result in fines up to $3,000. Gross receipts tax returns filed late are subject to a penalty of 5% per month, plus interest of 0.5% per month from the original due date until paid. An additional penalty of 1% per month (not to exceed 25%) is imposed for failure to pay (in whole or in part) the tax liability shown to be due on a timely filed return.
Many other states impose gross receipts taxes on sellers. In a few states, such as New Mexico and Hawaii, gross receipts taxes function similarly to sales tax. In others, like Washington, Ohio, and Texas, gross receipts taxes blend income and sales tax principles.
Localities are also looking to get a piece of the revenue made possible by gross receipts taxes. San Francisco and Portland have enacted gross receipts taxes in order to fund solutions to social issues. Other cities like Los Angeles have local business licenses that measure the license fee on gross receipts.
If your company operates in a state that has a gross receipts tax in addition to a retail sales tax and/or state income tax, you need to be aware of the distinct rules and requirements that separate the three. You don’t want to be caught off guard by a gross receipts nexus or filing obligation and any resulting penalties.