Gross Receipts Tax
Tax Glossary Term
Definition
A gross receipts tax is a tax levied on the total revenue (gross receipts) of a business without allowing deductions for costs of goods sold, operating expenses, or other business costs. Unlike a corporate income tax, which taxes profits (revenue minus expenses), a gross receipts tax applies to every dollar that comes in the door. This means a business with thin margins can owe significant tax even if it has little or no profit. Several states use gross receipts taxes as alternatives to or supplements to corporate income taxes, including Ohio (Commercial Activity Tax), Washington (Business & Occupation Tax), Oregon (Corporate Activity Tax), Nevada (Commerce Tax), and Texas (Margin Tax, a modified gross receipts tax). Because gross receipts taxes cascade through supply chains because each business in the chain pays tax on its full revenue, including the tax costs embedded from upstream, so they tend to be invisible to consumers but can significantly affect industries with long production chains or low margins. The rates are typically much lower than income tax rates because the base is so broad.
Example
A manufacturer buys $600,000 in raw materials and sells finished goods for $1,000,000.
Profit = $1,000,000 − $600,000 = $400,000.
Under a corporate income tax, only the $400,000 profit is the taxable base.
Under a gross receipts tax, the full $1,000,000 in revenue is the taxable base.
The gross receipts tax base is 2.5× larger than the income tax base, even though the economic profit is the same.
The GRT ignores the cost of materials entirely.