What is a gross receipts tax vs. sales tax? your responsibility explained

After you’ve been fielding your filing and remittance obligations for a while, sales tax can seem simple: Charge it to the customer, collect it, and send it back to the state when you file your sales tax return. Easy enough.

Not so, really, with gross receipts tax. What is a gross receipts tax? It is a tax on the total gross revenues of your company regardless of their source. It resembles a sales tax but it is levied on you the retailer of tangible personal property or services, rather than on the consumer (though usually it does ultimately pass through to the consumer).

It’s difficult enough to keep up with different economic nexus thresholds of states before realizing that some states’ revenue thresholds are based on gross sales, while other states are based on taxable sales. Do gross receipts include sales tax? How can you know what to do?

Gross Receipts Tax vs. Sales Tax: Location & Compliance

Economic nexus requires remote sellers that may not have previously had a physical presence to collect sales tax because they reach certain thresholds for annual state and jurisdiction revenue (for example, $100,000 or 200 sales, or both).

In states where only taxable sales are used to determine economic nexus, understanding if your products and services are taxable is the first part of the equation. You also need to know if any of your customers are exempt from sales tax. In general, exemptions are statutory exceptions eliminating the need for your retailer to collect sales tax on transactions with that customer.

Most states determine their threshold numbers by gross taxable sales, however, meaning the receipts for all revenue sources whether taxable or not (it’s best to check with the individual states where you have nexus). This can radically change the landscape of your sales tax obligations.

The concept of gross receipts nexus is itself constantly changing. For instance, in just the past few weeks a proposal from the Streamlined Sales Tax Governing Board for states to use gross sales to measure whether a remote seller crossed a state’s economic nexus threshold fell two votes shy of final approval, according to published reports.

Some states also have taxes that can be easily confused with gross taxable sales. For example, Hawaii has a general excise tax that is a business privilege tax on the gross receipts of virtually any economic activity carried on in the state, absent a few exceptions such as sales to nonprofit organizations.

Similarly, New Mexico does not have a sales tax, but rather a gross receipts tax imposed on persons engaged in business in the state. “In almost every case,” New Mexico says, “the person engaged in business passes the tax to the consumer either separately stated or as part of the selling price. Only in its effect on the buyer does the gross receipts tax resemble a sales tax. The gross receipts tax rate varies throughout the state from 5.125% to 8.8675% depending on the location of the business.”

The new way of selling

Online businesses used to sell just through their websites, which made nexus and sales tax straightforward. Now there’s a relatively new player in e-commerce: the marketplace facilitator. These companies – such as Amazon and Etsy, among others – act as sales platforms for online businesses, storing inventory, selling, shipping, and collecting and remitting sales tax for you the vendor.

Many e-commerce companies do brisk business using facilitators in addition to selling through their websites. The problem: Selling through a facilitator can give you nexus in more states than you realize – a critical factor when a gross-receipts state has sales tax laws for both marketplace facilitator and economic nexus laws.

Marketplace facilitators sometimes have their own nexus concerns over gross receipts taxes, as in Kansas, where both sales of the facilitator’s property and services and the sales it facilitates on its platform count toward nexus.

Gross receipts are just another wrinkle in your tax obligations. Contact us to learn about the latest gross receipts tax developments and how to remain compliant even with the ever-changing laws of sales and use tax.