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4/17/2015
April 23, 2015
Gross Receipts Taxes
Everything You Need to Know but Were Afraid to Ask!!
Eric M. Anderson, Andersen Tax LLC
Donald M. Griswold, Crowell & Morning LLP
Council On State Taxation
Agenda
• Introduction to Gross Receipts Taxes (GMT) and Gross Margin
Taxes (GMT)
• Examples of GRTs and GMTs
– Current State and City
– Defunct Taxes
• Possible future GRTs and GMTs on the legislative horizon
• Transactional vs. business activity distinction: the lynchpin of
taxability?
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What Are GRTs and GMTs?
• Generally imposed for the privilege of doing business in the
jurisdiction
• Base of tax
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Gross or net receipts – line 1 of federal income tax return (1120)
Margin – Line 3 of federal income tax return (1120)
Other items of income may be included
Some deductions may be allowed
• Apportionment
• Rates
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Policy Considerations
• Pros
– Simplicity
– Other?
• Cons
– COST Policy Position
• Gross receipts taxes violate principles of
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Transparency
Fairness
Economic Neutrality
Competitiveness
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Examples: Texas Margin Tax
Start with the lesser of: (A) 70% of total revenue from entire business, or (B) total revenue from entire business ‐ deduction equal to the greater of: (i) compensation and benefits, or (ii) cost of goods sold = unapportioned taxable margin x Texas apportionment factor = apportioned taxable margin ‐ deductions (for solar energy/clean coal) x tax rate (either 1% or 0.5%) = franchise tax before credits ‐ applicable credits = final franchise tax liability for non‐small business x applicable small business discount = final franchise tax liability for small business 5
Council On State Taxation
Examples: Texas Margin Tax
• Nexus
– Bandag decision
• COGS deduction
– Entity basis or combined basis?
• At any rate …
– 1.0%
– 0.5% retail/wholesale
• Opportunities
– 80/20
– Other?
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Examples: Ohio CAT
• To whom does it apply?
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Individuals
Corporations (S and C)
Partnerships
Limited Liability Companies
Disregarded entities
Trusts
Joint ventures
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Council On State Taxation
Examples: Ohio CAT
• Bright-line Nexus
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$50,000 Property,
$50,000 Payroll,
$500,000 Taxable Gross Receipts,
25% of total property, payroll, or taxable gross receipts,
Domiciled in Ohio
– L.L. Bean v. Levin, BTA Case No. 2010‐2853 (March 6, 2014)
• Assessment based on bright-line nexus upheld
• BTA lacks jurisdiction to declare a statute unconstitutional
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Examples: Ohio CAT
• Hot Issues
– Consolidation / Combination
– Taxable Gross Receipts
– Sourcing
• Sales Tax – Compare / Contrast
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Council On State Taxation
Washington B&O
• Every “person” taxable “for the privilege of engaging in business
activities” RCW §82.04.220
• Nexus depends upon your activity or activities (seriously!)
– Sellers of tangible personal property: physical presence
– Effective June 1, 2010 persons engaged in “apportionable activities” taxable if
domiciled in WA or meet statutory nexus standard (50/50/500 or 25% rule)
• Tax rate applies to each separate activity
– 49 separate rates of tax for different activities
– Most common rates:
• Retailing
.471%
• Manufacturing
.484%
• Wholesale
.484%
• Services and other business activities 1.5% (1.8% 1/1/10 - 6/30/13)
• Contestants of chance 1.8% or 1.93% based upon gross income
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Washington B&O
• Inbound and outbound sales of TPP (WAC 458-20-193)
– Outbound: tax applies to delivery in WA when seller’s dominion ceases
– Inbound: tax applies when the goods are delivered by the purchaser in Washington
and the seller has nexus
• Apportionment of income (WAC 458-20-19402 eff. 6/1/2010)
– Taxable income is determined by multiplying apportionable income from each
apportionable activity by its receipts factor
– The numerator of the receipts factor is the total apportionable gross income of the
business attributable to WA
– The denominator of the receipts factor is the total apportionable gross income of
the business everywhere, less amounts that are attributed to states where the
taxpayer is not taxable or has nexus by Washington standards.
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Washington B&O
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Services sourcing hierarchy WAC 458-20-19402
1. Where the customer received the benefit of the taxpayer’s service.
2. If the customer received the benefit of the service in more than one state, gross
income must be attributed to the state in which the benefit of the service was
primarily received (more than 50%).
3. If the taxpayer is unable to attribute gross income of the business under (1) &
(2) above, the income is sourced to the state from which the customer ordered
the service, followed by billing address, state from which the customer sends
payment or customer address.
4. If the taxpayer is unable to source the gross income under any of the above, the
gross income must be sourced to the commercial domicile of the taxpayer.
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Washington B&O
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Royalties sourcing hierarchy WAC 458-20-19403
1. Place of use: where the customer used the taxpayer’s intangible property.
2. Place of primary use: if the customer used the property in more than one state,
gross income of the business must be attributed to the state in which the
intangible property was primarily used (more than 50%).
3. If the taxpayer is unable to attribute royalty income of the business under (1) &
(2) above, the income is sourced to the customer’s state from which the royalty
agreement was negotiated followed by customer billing state, payment state and
finally customer address.
4. If the taxpayer is unable to source the gross income under any of the above, the
gross income must be sourced to the commercial domicile of the taxpayer.
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Washington B&O
Proposed legislation
• Increase services rate to 1.8%
• Repeal certain preferential rates (travel agents, prescription drugs,
royalties)
• Create new nexus standards
• Change Rule 193 to “clarify” no transactional nexus requirement
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San Francisco
• Enacted as Article 12-A-1
• Gross receipts tax on every “person” for the privilege of engaging in
a business or occupation within the City of San Francisco imposed
to the extent allowable under the US and California Constitutions
• A 5-year phase-in period whereby the payroll expense tax (PET)
incrementally reduce while the GRT incrementally increases over
the same period
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2014 – 10 percent GRT and 90 percent PET;
2015 – 25 percent GRT and 75 percent PET;
2016 – 50 percent GRT and 50 percent PET;
2017 – 75 percent GRT and 25 percent PET; and
2018 – 100 percent GRT.
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Council On State Taxation
San Francisco
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Rates range from 0.075% to 0.650% based upon the taxpayer’s NAICS
code
80/20 rule for determining whether separate activities taxed
“Related entities” required to file combined returns – defined as any entities
that would be required to file a combined corporation tax return
– Requires included entities to provide a power of attorney
– No provision for intercompany transactions
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Allocation and apportionment also based upon NAICS code
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San Francisco
Apportionment and Allocation: 2 Methods
• Allocation Section 956.1
– Gross receipts from the sale, lease, rental or licensing of real property are in the
City if the real property is located in the City
– Gross receipts from sales of tangible personal property are in the City if the
property is delivered or shipped to a purchaser within the City regardless of the
f.o.b. point or other conditions of the sale
– Gross receipts from the rental, lease or licensing of tangible personal property
are in the City if the property is located in the City
– Gross receipts from services are in the City to the extent the purchaser of the
services received the benefit of the services in the City
– Gross receipts from intangible property are in the City to the extent the property
is used in the City. In the case of financial instruments, sales are in the City if the
customer is located in the City
• Apportionment Section 956.2 – Payroll Factor
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Council On State Taxation
San Francisco
Selected Industries
• Financial Services – maximum tax rate at 0.560% and source
receipts based upon apportionment only
• Professional services - maximum tax rate at 0.560% and source
receipts based upon apportionment only
• Real Estate Rental and Leasing Services - maximum GRT rate of
0.300% and source receipts based upon allocation only
• Retail/Wholesale - maximum GRT rate of 0.160% and source
receipts 50% based upon allocation and 50% based upon
apportionment
• Manufacturing/Biotech/Information - maximum GRT rate of
0..475% and source receipts 50% based upon allocation and 50%
based upon apportionment
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Other GRTs Lurking?
• Pay attention to the “L” in SALT
– Philadelphia, PA has filed lawsuits based upon jeopardy assessments
– City of San Mateo, CA hired a contract auditor from…Alabama!
• Several Taxes Have Come and Gone
– New Jersey alternative minimum assessment
– Michigan business tax
– San Francisco (!)
• Are there others out there?
– Nevada margin tax defeated but gross receipts proposal has taken its place
– California Commission on the 21st Century Economy BNRT proposal
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Council On State Taxation
Framework for Analysis:
Transaction vs. Activity
Does it matter if GRTs/GMTs are characterized as taxes upon
transactions vs. activities?
• Washington Nexus Controversy
– Does Norton Co. v. Dep’t of Revenue, 340 U.S. 534 (1951), continue to apply?
– State of Washington v. Avnet pending in Washington Court of Appeals
– Can Washington change Rule 193 retroactively?
• Ohio Exemption Controversy
– Ohio Grocers Ass’n. v. Levin, 916 NE2d 446 (2009)
– While tax found not to be a prohibited tax upon the sale or purchase of food,
could it still be subject to the nexus requirements of Norton?
• Should TX Margin Tax be subject to PL 86-272?
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Contact Information
Eric M. Anderson
Andersen Tax LLC
San Francisco, CA
(415) 764-2766
[email protected]
Donald M. Griswold
Crowell & Moring LLP
Washington, D.C.
(202) 624-2730
[email protected]
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