Most states levy some form of a corporate income tax (CIT) or sales tax. States such as Texas, Ohio and Washington, impose a gross receipts tax (GRT) instead. A few states like Delaware and New Mexico impose both a CIT and GRT.
A GRT is a tax on business receipts rather than income on sales. Typically, few or no deductions are allowed on a GRT.
While GRT and retail sales tax both tax receipts, sales tax applies to final retail sales to consumers while the GRT applies to all transactions including sales for resale. Sales tax is typically levied on the purchaser of the good or service. GRT, on the other hand, is imposed on the seller.
The GRT applies to pass-through entities, including limited liability companies, S corporations at the entity level. Some states, such as Massachusetts, do not allow owners of flow through entities to take a credit for GRT paid by the business because these taxes are not considered income based taxes.
Since the GRT is not considered sales tax, there is no physical presence requirement as described in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). However, a business may be subject to the GRT in a state where they do not have a physical presence but exceed a certain sales threshold. Because the GRT is also not consider an income tax, sellers of tangible personal property are not protected by P.L. 86-272 even if physical presence is established solely due to representatives soliciting sales within the state. In addition, entities operating at a loss will still have a tax liability since GRT is not based on income.
Feel free to call us at 610.828.1900 if you have questions on basis. Contact either Michael Sexton, CPA, CCIFP, Director – Tax Services at Michael.Sexton@MCC-CPAs.com or me at Marty.McCarthy@MCC-CPAs.com. We are always happy to help.