Gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es may be relics of the past but they continue to pop up like the proverbial Whack-A-Mole. Just last year, Ohio enacted a new Commercial Activities Tax (CAT) that broadly applies to the gross receipts of all companies doing business in Ohio. An Ohio proposal recently covered in State Tax Notes would expand Ohio’s gross receipts taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to the taxable receipts of credit card companies for the “privilege” of doing business in Ohio.
H.B. 200, introduced in May of this year, would expand the gross receipts tax to credit card companies, charging them an identical rate (.26 percent) as other businesses will pay when the CAT is fully phased in. On the surface, this seems like reasonable tax policy. After all, a good tax system will treat all businesses the same, and there is no reason that credit card companies with Ohio gross receipts should be exempt from the CAT.
On closer inspection, however, there are two major problems with this legislation:
- The bill defines “taxable gross receipts” to include the total amount charged to a credit card at a location in Ohio in addition to fees and interest received by credit card companies from Ohio customers
- The bill attempts to limit credit card companies from passing the tax on to any other person
The problem with including the total amount charged on credit cards in taxable gross receipts is obvious: it turns a payment by credit card companies into a taxable gross receipt to the credit card companies. When an Ohio citizen buys $100 in clothes at Target and uses a VISA card to pay for it, VISA pays Target $100 (minus a fee charged to Target) on the customers behalf. This $100 is included in Target’s CAT base, but in no sense should it be considered a gross receipt to VISA—especially since including it would constitute double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of the same gross receipts by two different taxpayers and exacerbate the tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. problem inherent in all gross receipts taxes . Thus, the only Ohio-source gross receipts that should be taxable to VISA are fees and interest payments received from Ohio customers.
The other problem with the bill—its attempt to restrict credit card companies from passing the tax on to its customers—is also obvious. Credit card companies can—and likely will—shift the cost of this tax to customers, shareholders, or workers in the form of higher prices (i.e. requiring higher interest payments or raising fees for retailers that take credit card payments), lower wages, or lower dividend payments. The bills attempt to ignore this economic reality will ultimately fail though it is an acknowledgment that businesses don’t actually pay taxes—people do.
This bill has the potential to raise over $200 million a year in Ohio, which already has the nation’s third highest state and local tax burden. Earlier this year we released an analysis of the Ohio tax system which showed how far Ohio lawmakers have to go to increase their business tax competitiveness—this proposal certainly does not help in that regard.Share