State gross receipts taxes—a new trend in state tax law?
President Trump, his administration, and the GOP-controlled Congress have suggested major changes to the Affordable Care Act, Medicaid, trade and immigration policy, and the federal tax structure. Many of the proposed changes are likely to have some impact on state economies and budgets—both positively and negatively, although it is much too early to determine the extent of that impact.
Facing the uncertainty of federal tax reform, and in addition to widespread budget deficits and lackluster economic growth, several states are considering new (or bringing back old) methods of revenue generation. In addition to rolling back spending, increasing tax rates, and broadening tax bases, one trend developing in state legislatures are proposals for state gross receipts taxes.
In 2005, Ohio enacted a commercial activity tax (CAT) that was scheduled to, and ultimately did, replace the corporate franchise tax. The Ohio CAT applies to most businesses, regardless of the type of business organization, with taxable gross receipts of more than $150,000 in the calendar year. The CAT applies a bright-line economic nexus standard to out-of-state taxpayers $50,000 in Ohio property, $50,000 in Ohio payroll, or $500,000 in taxable gross receipts; or at least 25 percent of the person’s total property, total payroll, or total taxable gross receipts within the state.
That factor-presence standard was recently challenged in Crutchfield Corp. v. Testa. The Ohio Supreme Court found that a physical presence was not required in order for the state to impose the CAT on out-of-state businesses with taxable receipts in Ohio. The taxpayers eventually settled with the state in lieu of an appeal to the U.S. Supreme Court.
In 2015, Nevada enacted its Commerce Tax, a tax imposed on gross receipts exceeding four million dollars. At least three other states are considering a statewide gross receipts tax in 2017: Louisiana, Oregon, and West Virginia.
Faced with a half-billion dollar budget shortfall and likely taking notice of the success of the Ohio CAT, West Virginia Gov. Jim Justice proposed a gross receipts tax as part of a larger tax package that would include lowering the sales tax. The Oregon Senate proposed a state constitutional amendment that would create a new business privilege tax in the form of a gross receipts tax. Based on Senate Joint Resolution 41, introduced on Feb. 14, 2017, the tax would be 0.7 percent on receipts in excess of $5 million. In Louisiana, Gov. John Bel Edwards released details on a proposed gross receipts tax similar to the Ohio CAT that would be imposed on taxable receipts of at least $1.5 million.
Half the states are feeling the impacts of revenue shortfalls with estimates that up to 40 states will need to fill budget gaps for fiscal year 2018. With the success of the Ohio CAT, and the recent blessing of the factor-presence nexus standard by the Ohio Supreme Court, other states are looking very closely at whether a gross receipts tax would be the X-factor in balancing state budgets and reducing or eliminating state corporate income taxes. The legislative season is still young, and regardless of whether any state enacts a gross receipts tax in 2017, we may be hearing a lot more about these taxes in the next few years.