State Income Tax versus Gross Receipts Tax


There are a growing number of states looking at the gross receipts tax as an option for collecting tax from businesses. Why? That’s the easy part to answer. States need money. Some states such as Texas have a state constitution that forbids taxing income at the state level. So, how do they raise needed money?

The answer is the gross receipts tax. There are currently a handful of states that have a form of this tax. These include Arizona (only for 16 industries), Delaware, Hawaii, Illinois, MIssissippi, New Mexico, Ohio, Texas and Washington.

Most economists view this as a very anti-growth tax. It allows “tax pyramiding” which means a contractor will pay the tax based on TOTAL sales, with no deduction for amounts paid to sub-contractors, who then pay the tax on the amount they receive from others who already paid the tax.

It’s a CPA’s nightmare. Most states have a tax that is based on the net income of the company. So, the strategy is exactly the same as the strategy that we’d use for federal income tax planning - more deductions. In the case of the gross receipts tax, the income stream, starting at the top, needs to be moved to another state if that is possible. Otherwise, all the deductions in the world can’t reduce this tax.

I suppose the world’s worst state planning would be to live in Florida as your primary residence with a lot of wealth (Florida intangible tax), sell products through an affiliate in New York (New York sales tax), use a CPA in California (creating California nexus, or at least CA thinks so until and if the Supreme Court gets involved), run your business through Texas (Texas “margin” tax - a gross receipts tax) and then upstream into Oregon (another high state income tax rate). You have a second home in Oregon (high property tax) and do all your shopping across the border in Washington (and pay sales tax).

Whew! That’s the nightmare. And here’s the good news - it is possible to set up your business and personal income to minimize the effect of these different types of state taxes. One of the advantages of working with a national virtual tax firm like mine, Diane Kennedy’s Tax Services, is that we can look beyond your local tax issues. We have full time researchers who keep up on federal AND state tax issues and proposed policies. If you’d like to have a broader perspective on your current tax situation, drop Richard an email at CPA@TaxLoopholes.com or give him a call at 888.592.4769.


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