Gross Receipts Taxes: A Growing Trend in State Taxation

By Jerry Hammond, Tacoma, WA

Editor: Nick Gruidl, CPA, MBT

As states try to reduce budget deficits and find more forms of tax revenue, they are increasingly looking at gross receipts taxes as a viable way to tax corporations. The number of states imposing gross receipts taxes is small but growing. Michigan recently enacted the Michigan Business Tax (MBT), which has a gross receipts component. Other state gross receipts taxes include the Ohio commercial activities tax (CAT), the Texas franchise tax on “margin,” and the Washington business and occupation (B&O) tax. New Jersey and Kentucky also have gross receipts components in their corporate tax structures.


States have watched as corporate income taxes have shrunk as a percentage of state tax collection. Between 1980 and 2004, state corporate income tax revenues fell from their peak in 1980, when they represented 9.6% of total state taxes collected. By 2004, corporate income taxes represented only 5.2% of total state taxes collected. Not only did corporate income taxes shrink as a percentage of total state tax collected, but the effective tax rate also declined. By 2004, the effective state corporate income tax was less than 4%, having fallen from the 1980 peak of 8% (U.S. Census Bureau, State Government Tax Collections: 2004 (rev. January 2006)). Some state legislators no longer consider the corporate income tax a stable source for funding state government.

One obvious reason for this volatility is that corporate income tax collections have fluctuated with the national economy, for better or worse. However, states blame four other factors for the long-term decline in state corporate income taxes:

  1. Federal laws limiting the state tax base;
  2. A decline in the federal income tax base;
  3. Corporate participation in tax planning; and
  4. State legislative actions to reduce tax bases (Federalism at Risk: A Report of the Multistate Tax Commission (June 2003)).  

Federal Limits on State Taxation

Under the U.S. Constitution, Congress has the authority to regulate commerce among the states. Congress used its authority when it passed the Interstate Income Tax Act, P.L. 86-272, to restrict the activities that create a state income tax filing requirement. P.L. 86-272 was a response to the U.S. Supreme Court’s decision in Northwestern States Portland Cement Co. v. Minnesota, 358 US 450 (1959), and primarily allows businesses to solicit sales of tangible personal property in a state without incurring a state net income tax filing requirement.

Following P.L. 86-272, Congress passed numerous bills regulating interstate commerce. For example, the Railroad Revitalization and Regulatory Reform Act, P.L. 94-210, prohibits a state from taxing railroad property more heavily than other commercial or industrial property. Congress subsequently extended the prohibition to motor carriers (49 USC §14502) and air carriers (49 USC §40116). Among other limitations, Congress also:

  1. Limited states’ ability to levy stock transfer taxes (15 USC §78bb(d));
  2. Superseded all state taxes related to employee benefit plans (29 USC §1144(a));
  3. Prohibited localities from taxing providers of direct-to-home satellite services (Telecommunications Act of 1996, P.L. 104-104);
  4. Prohibited states from taxing interstate passenger transportation (ICC Termination Act of 1995, P.L. 104-88); and
  5. Prohibited state and local governments from imposing new taxes on internet access (Internet Tax Freedom Act, P.L. 105-277).

Decline in Federal Tax Base

Due to states’ reliance on federal taxable income as the starting point for their corporate income tax, the widely reported decline in the federal income tax base has resulted in reduced state corporate income taxes. Much of the decline in federal corporate income taxes is a result of Congress’s allowance of passthrough entities for federal income tax purposes. Income once attributed to corporations is now reported as the income of S corporations, partnerships, and limited liability companies and is therefore considered personal, rather than corporate, income.

A common reason to form such entities is to eliminate double taxation—taxation at the corporate level and shareholder level. The passthrough of corporate income to the shareholders, partners, or members creates challenges for states when they try to administer and collect income taxes from nonresident partners of passthrough entities domiciled outside their respective states.

Federal “bonus” depreciation resulting from the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16, also led to a decline of the federal corporate income tax base. Unless states passed legislation to decouple from bonus depreciation, their corporate income tax base decreased. Unfortunately for some states, decoupling occurred only after state revenue was noticeably reduced.

State Income Tax Planning

State lawmakers see significant differences between what corporate taxpayers pay in state income taxes, and some wonder if tax planning might explain a material part of these differences. In response, they sometimes pass new laws to limit or eliminate the use of these tax planning techniques in their states. New strategies appear regularly, however, and some are never legislated out of existence. 

Reduced State Tax Bases

As part of the competition for jobs, states have established various tax incentives to encourage investment (see the next item). When deciding where to locate a new plant or whether to expand an existing one, companies consider the overall state and local tax burdens, including available tax credits and incentives. Other state efforts also reduce the tax base. For example, some states are changing from traditional three-factor apportionment formulas (sales, property, and payroll) to apportionment formulas that use sales only. This places greater emphasis on a company’s sales in a state and often reduces the tax burden for companies with property and payroll in the state.

Some Gross Receipts Tax Concerns

Gross receipts taxes do not consider whether the taxpayer made any profit to pay a tax on the transaction. They may be imposed each time a product or service turns over from the time the raw material is extracted until it reaches the final consumer. This “pyramiding” or “cascading” favors integrated firms. The tax focuses on transactions, not on profit.

In additional, gross receipts taxes need to address complex issues such as sourcing multistate services, requirements for filing returns, instructions for filing consolidated returns, and transition issues such as the use of net operating losses and credits. States are also likely to grapple with the historical trend that legislators complicate gross receipts taxes with multiple rates and deductions.

Where from Here?

States are closely watching the gross receipts tax experiences of other states to determine if this is a better way to tax corporations. They are weighing the merits of a broad-based tax with low rates that produces a more even revenue flow. They may also appreciate that gross receipts taxes are difficult to reduce through corporate planning and are not currently subject to the federal limitations of P.L. 86-272. Will other states adopt a gross receipts tax to replace or supplement their state income taxes? It is difficult to say, because despite the benefits, passing a gross receipts tax may not be an easy task.


Nick Gruidl, CPA, MBT, Managing Director, National Tax Department, RSM McGladrey, Inc., Minneapolis, MN

Unless otherwise indicated, contributors are members of RSM McGladrey, Inc.

If you would like additional information about these items, contact Mr. Gruidl at (952) 893-7018 or

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