Gross Receipts Taxes Face Policy and Legal Challenges
Stephen P. Kranz, Diann Smith, Joe Bishop-Henchman
National Law Review
September 24, 2019
“Generally, the only places with gross receipts taxes today are U.S. states and developing countries.” –Professor Richard Pomp, University of Connecticut
The resurgence of GRTs is surprising, given they had all but disappeared by the end of the 20th century. Kentucky, Michigan, New Jersey and West Virginia had recently repealed theirs. Every country that had a gross receipts tax, or turnover tax as they were historically called, recognized their flaws and switched to other forms of taxation by the 1970s. Public finance scholars are very critical of gross receipts taxes for the incredible damage they inflict on an economy, their lack of transparency, their imposition even on unprofitable businesses, and the economic distortions that come from the tax’s inherent “cascading” or “pyramiding”—embedding taxes within taxes, through each stage of the production chain. Adam Smith, writing in The Wealth of Nations, blamed Spain’s alcavala gross receipts tax for their national economic decline, and studies have found that developing countries adopt gross receipts taxes but switch away from them once their economy and tax collection system mature.
So, why the sudden popularity? It’s simple, really: GRTs raise enormous sums of revenue with a deceptively low tax rate, and are collected by a relatively small number of taxpayers (businesses). Oregon, for instance, estimates that their new 0.57% CAT will raise over $1 billion per year for Oregon schools, compared to the $736 million raised by the 7.6% corporate income tax. San Francisco expects to raise $250 million annually from a recent gross receipts tax increase, imposed on just 400 firms. GRTs are also a way to shift the overall tax burden from in-state businesses onto businesses with capital-intensive production, or businesses that sell nationwide or worldwide.
If GRTs in practice don’t strike you as simple, you’re not alone. Firms doing business in states that have adopted GRTs face legal and compliance issues such as easy-to-trigger nexus thresholds, how to handle nexus questionnaires, apportionment, whether to pass it forward to customers, definitional disputes, whether to adjust business processes to minimize liability, and a ramp up in administrative rulemaking. Some states have ratcheted up complexity as they try to mitigate pyramiding—for example, the Nevada Commerce Tax has 27 different tax rates—and which category a business falls in can be a difference of tens of millions of dollars in tax liability.