As states continue to face the uncertain impact of federal tax reform on their budgets, a possible downturn in the economy, and several years of lackluster state and local tax collections, many state legislatures have been considering new (or bringing back old) methods of revenue generation. In addition to rolling back spending, increasing tax rates, and broadening sales tax bases, one trend that may be developing is state and local gross receipts taxes. Gross receipts taxes are generally levied on a company’s gross receipts instead of its net income and are imposed with a low tax rate on a broad tax base with fewer exemptions and deductions than an income tax.
In 2005, Ohio enacted a commercial activity tax (CAT) that was scheduled to, and ultimately did, replace the state’s corporate franchise tax. The Ohio CAT applies to most businesses, regardless of the type of business organization, with taxable gross receipts of more than $150,000 in the calendar year. The CAT applies a bright-line economic nexus standard to out-of-state taxpayers: the taxpayer must have $50,000 in Ohio property, $50,000 in Ohio payroll, or $500,000 in Ohio gross receipts; or have at least 25 percent of its total property, total payroll, or total taxable gross receipts within the state, in order to be subject to the tax.
Nevada enacted its Commerce Tax in 2015, a tax imposed on gross receipts exceeding four million dollars. And, most recently, Oregon enacted a corporate activity tax of $250, plus 0.57% of the business’s Oregon-sourced receipts over $1 million. The Oregon tax, somewhat modeled after the Ohio CAT, is scheduled to be effective Jan. 1, 2020.
In the last few years, several other states have proposed gross receipts taxes, but these proposals have not always been successful. In 2017, West Virginia Gov. Jim Justice proposed a gross receipts tax as part of a larger tax package that would include lowering the sales tax. Also that year, Louisiana Gov. John Bel Edwards released details on a proposed gross receipts tax similar to the Ohio CAT that would be imposed on taxable receipts of at least $1.5 million. Neither proposal was successful.
While Oregon is the only state to adopt a gross receipts tax in the past year, state and local jurisdictions that currently impose such taxes have been busy, especially in the west. In San Francisco, the city enacted a new economic nexus standard for its existing gross receipts tax, in addition to adopting a broader receipts base through a commercial rents tax and homelessness gross receipts tax. In Washington, the state closed out the 2019 legislative session with significant changes to its business and occupation tax, including changes for certain designated service-based industries and for large advanced computing companies.
Takeaways
State budget shortfalls have improved in the last year, although the growth in state tax collection remains underwhelming. Additional sales and use tax revenues due to economic sales tax nexus provisions are helping boost budgets, but recent reports have suggested states overestimated the impact of the South Dakota v. Wayfair decision. States are also beginning to see the first year or so of positive impact resulting from federal tax reform, but are still responding to that legislation by adjusting their corporate income tax provisions. Overall collections from a state corporate income tax are generally under 5% of total state tax collections – a relatively minor amount in most states, meaning tax reform’s positive impact on the states may not save budget deficits.
New states may be looking very closely at whether a gross receipts tax could be a cure-all in balancing state budgets and reducing or eliminating state corporate income taxes. While the 2019 legislative season may be over for most of the states, companies doing business in states or cities with gross receipts taxes need to be aware of frequent changes in those laws and should consider tax planning to appropriately mitigate exposure or reduce outstanding gross receipts tax liabilities.
