A 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.
History of Gross Receipts Taxes
Taxes on gross receipts originated in Europe as early as the 13th century but were later replaced with value-added taxes, which are more stable, more transparent, and less economically harmful. In America, the first gross receipts tax was established in 1921 by West Virginia as a “business and occupations privilege” tax. Gross receipts taxes spread during the 1930s, as the Great Depression reduced state property and income tax revenue. By the late 1970s, however, gross receipts taxes began to be repealed or struck down as unconstitutional by state courts.
Gross Receipts Taxes have returned as a revenue option for policymakers after being dismissed for decades as inefficient and unsound tax policy. Their appeal comes as many states are looking to replace revenue lost by eroding corporate income tax bases and as a way to limit revenue volatility.
Nearly all states use gross receipts as a tax base in some context, most commonly for utility and energy companies. (These limited taxes, however, have far less potential for harmful tax pyramiding, and are closer to functioning as ad valorem excise taxes.) Gross receipts taxes also exist at the municipal and county levels.
The Effects of a Gross Receipts Tax
Because gross receipts taxes are imposed at intermediate stages of production and do not allow deductions for costs, they are not based on profits or net income (like a corporate income tax) or final consumption (like a well-constructed sales tax). They provide an advantage to businesses with high profit margins or considerable vertical integration, while they penalize companies with narrow margins or multiple transacted stages of production. This distorts economic decision-making, incentivizing firms to vertically integrate, adjust production to gain a more favorable industry classification, or move stages of production outside the taxing jurisdiction. This introduces inefficiency, to the extent that businesses make economic decisions hinging on tax planning and avoidance strategies, and inequity, to the extent that businesses are unable to respond in this manner.
The adverse effects of having to pay gross receipts taxes can be particularly severe for startups which post losses in early years. To the extent that most or all businesses in a given market are subject to gross receipts taxes, much of the pyramiding tax costs are ultimately passed along to consumers.Share