What is gross receipts tax?
We explore what gross receipts tax is, how it works, its effect on businesses, how it differs from other types of tax, and more.
Summary
Gross receipts tax is based on gross receipts instead of gross sales.
GRT can affect businesses in various ways.
GRT rules depend on your location.
A financial advisor can help you comply with local rules.
What are gross receipts taxes?
It helps to know what gross receipts are if you want to understand the basics of gross receipts tax (GRT).
Gross receipts refer to the total amount of all receipts in property or cash. These are calculated without deductions for costs of goods sold, compensation, or other business expenses. However, the exact components of gross receipts vary according to municipality and state.
GRT are taxes applied to companies’ gross sales in various local tax authorities and several individual states.
How do gross receipt taxes work?
As mentioned above, gross receipts taxes are based on a business’s gross receipts without deductions for expenses and other items.
This means that gross receipts include anything unrelated to the business’ normal activity, such as interest and dividend income, donations, tax refunds, and others. Discount and price adjustments are not considered.
In some local tax jurisdictions and states, businesses pay GRT instead of sales tax or corporate income tax. Even though these jurisdictions and states tax the business rather than the consumer, most businesses pass the cost on to consumers through higher retail prices.
Let’s consider two examples of these taxes.
According to Ohio’s Revised Code Section 5751.01, gross receipts for Commercial Activity Tax is the total amount realized, without deducting the cost of goods sold or other expenses, that contributes to the production of a person’s gross income. This includes any property’s fair market value and any services received, as well as debts forgiven or transferred.
In San Francisco, 2023’s GRT rates depend on a business’s gross receipts and business activity. The table below offers an idea of how these rates differ according to business type.
| Business Activity | 0-$1 million | $1-$2,5 million | $2.5-$25 million | $25+ million |
|---|---|---|---|---|
| Retail Trade; and Certain Services | 0.05% | 0.07% | 0.10% | 0.22% |
| Wholesale Trade | 0.11% | 0.14% | 0.19% | 0.22% |
| Manufacturing and Food Services | 0.09% | 0.14% | 0.26% | 0.67% |
| Transportation and Warehousing; and Clean Technology | 0.18% | 0.29% | 0.52% | 0.67% |
| Biotechnology | 0.18% | 0.30% | 0.54% | 0.69% |
How do gross receipt taxes affect businesses?
Gross receipts taxes affect businesses in various ways. The main effects include:
Businesses pay more tax.
These taxes can be burdensome for startups.
Gross receipts taxes impact high sales volume businesses disproportionately.
These taxes create a larger tax burden on goods with more production stages.
GRPs incentivize fewer business-to-business transactions.
What things should you consider when it comes to gross receipt taxes?
There are a few things to think about when it comes to gross receipts taxes. These include:
Business loans: You might need to work out your gross receipts tax if you want to apply for a business loan.
Personal income: Some business owners, such as sole proprietors, report income passing through the business as personal income, which they can’t know without calculating gross receipts.
Small business determination and qualifications: In some locations, your business’s status as a small business for various tax and accounting methods under IRS rules depends on gross receipts.
Local compliance: Gross receipts tax rules vary according to location, so ensure you comply with your local/state rules.
Consultation: Unbiased can match you with a financial advisor if you have questions or concerns about your tax obligations.
How does gross receipts tax differ from other types of taxes?
Gross receipts tax differs from other tax types in various ways. For starters, this type of tax is based on business revenue rather than profit, which differs from traditional sales taxes or income taxes.
Some states tax businesses’ net income, which is sales minus expenses. You don’t deduct expenses when calculating your business’ gross receipts. This distinction is important for understanding what gross receipts tax is.
Which businesses are typically subject to gross receipts tax?
The types of businesses that are subject to gross receipts tax vary from location to location. In some states that apply this type of tax, most businesses must pay GRT. In others, only businesses with significant revenue or specific types of business must pay this tax.
The types of businesses subject to GRT can vary by location. In some states, it applies to most businesses, while in others, only specific industries or businesses with substantial revenue are affected.
As we saw in the table above, some of the San Francisco business types affected include retail and certain services, wholesale trade, manufacturing and food services, transportation and warehousing, clean technology, and biotechnology.
Are there any exemptions or deductions available under gross receipts tax?
Exemptions or deductions might be available under gross receipts tax, depending on where your business is located. As with all things GRT-related, exemptions and deductions are determined by the state or local tax authority’s rules and regulations.
In some jurisdictions, there are exemptions for small businesses up to a specific revenue threshold or for specific industries.
How can businesses stay compliant with gross receipts tax requirements?
There are three important things to remember when it comes to ensuring your business stays compliant with gross receipts tax requirements. These include:
Keep accurate financial records: You can’t work out GRT or run a business effectively without keeping accurate financial records.
Understand local tax laws: There is no standard set of GRT laws, so ensure that you know which rules apply to you and your business.
Speak to tax professionals: You should enlist the help of a tax professional to ensure that your business complies with GRT laws.
What are the economic implications of gross receipts tax?
Gross receipts tax has various economic implications.
Some of the areas it impacts include economic growth, investment, and decision-making within businesses. Policymakers and businesses should consider the potential effects of GRT on the local and national economy.
The bottom line
Whether applied state-wide or in local tax authority jurisdictions, gross receipts tax is based on a business’s gross receipts rather than gross sales. Expenses aren’t deducted. GRT tax laws vary from location to location, so it’s important to know and understand the rules that apply to your business.
Let Unbiased match you with an SEC-regulated financial advisor who can help you better understand what gross receipts tax is and who can offer expert financial advice.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.