What Is a Gross Receipts Tax?

Gross receipts tax is a type of business tax that is imposed in certain states in the United States. This type of tax is designed to charge the companies based on the total amount of money that they bring in. This is a tax that is imposed in lieu of a traditional sales tax. 

Gross Receipts Tax

The gross receipts tax or a variation of it is found in Arizona, Delaware, Hawaii, Illinois, Mississippi, New Mexico, Ohio, Pennsylvania, Washington and West Virginia. These states believe that it is to their advantage to charge businesses a gross receipts tax instead of charging consumers a specific sales tax. With this system, they look at the total amount of money that is brought in by the company. Then they charge a specific percentage based on how much money is made. 

Ease of Application

Primary advantages of this type of tax strategy are that it is easy to enforce and easy for companies to adhere to. There is not a complicated process of determining how much sales tax a company has taken in. Instead, the company can simply total up everything that they bring in. This calculation can be done quickly and easily. The authorities can also keep track of this information much more easily. They can simply look at the tax returns of the company in order to determine how much they owe for the year.

Easy Pricing

Another advantage of this system is that it utilizes straightforward pricing for consumers. When you go into a retail establishment and see a price on a product, you know that the price is exactly how much you will have to pay for it. You do not have to be familiar with local tax rates and do a quick calculation in order to determine how much you will actually have to pay out of pocket. Many consumers prefer this type of pricing because it is simpler to work with.

Vertical Integration

Even though gross receipts tax is simple, it does have its critics. Many economists have argued against gross receipts tax because it causes several other problems. One of the problems that it causes is vertical integration. Many companies have merged with each other in order to vertically integrate in their markets. When this happens, instead of having several companies that have to pay separate taxes, they merge into a single company. The supplier, the distributor and the retail merchant are all under the same ownership. This way, they can lower the total costs and significantly lower their tax bill as well.

Different Tax Rates

Another criticism of gross receipts tax is that it promotes different tax rates among different industries within the state. Since certain industries make more money than others, they will fall into different tax brackets. This means that certain industries will have to pay a higher effective tax rate than others, which many view as an unfair side effect of this system.

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