Taxpayers conducting multistate business operations throughout the United States are subject to myriad business taxes and other compliance obligations. Most taxpayers are familiar with corporate business taxes, sales and use taxes, withholding taxes, and property taxes and have implemented systems to monitor and comply with filing and payment requirements. Some taxpayers, however, may be surprised to discover that a number of states impose gross receipts taxes on business entities either in lieu of or in addition to, traditional income-based taxes, state sales tax, local sales taxes, and use taxes.
Failure to comply with state gross receipts taxes may result in unexpected tax assessments as well as penalties and interest. Taxpayers with gross receipts tax exposure in prior periods, however, may have an opportunity to pursue remediation options through a state’s voluntary disclosure agreement process or tax amnesty program, if available.
This alert is intended to make taxpayers aware of state gross receipts taxes in the United States and provide general guidance about nexus standards, filing requirements, and other considerations. Taxpayers that may have current or prior year gross receipts tax liabilities should consult with their tax advisors for further guidance. Please note that the following is general in nature and is not intended to address all potential factual situations. We recommend you reach out to Bennett Thrasher’s State & Local Tax Team for any questions.
Overview of State Gross Receipts Taxes
Gross receipts taxes are generally imposed on a taxpayer’s gross receipts derived from in-state sales of tangible personal property or services. These taxes are imposed at comparatively lower rates than sales and use taxes and corporate income taxes, and the frequency with which taxpayers are required to file returns may be annual, quarterly, or monthly.
Factor-based nexus rules apply for most state gross receipts taxes. Generally speaking, these rules establish a threshold level of in-state activity, often measured by property, payroll, or sales, that an out-of-state company must exceed before the company is deemed subject to tax. These thresholds are sometimes higher than the thresholds for income tax and sales and use tax. Gross receipts taxes are imposed on nearly all entity types, regardless of an entity’s classification for federal tax purposes, and may be imposed on a separate, combined, or consolidated basis.
Gross receipt taxes differ from traditional sales and use taxes because the tax is imposed directly on the seller, with limited options for passing the tax on to customers. Only limited exclusions and deductions for business expenses are permitted to offset the gross receipts tax base.
Currently, six states levy a gross receipts tax. Based on our experience in advising taxpayers, the states where compliance requirements are most often missed are Ohio, Tennessee, and Washington. The Oregon gross receipts tax was enacted for tax years beginning on or after January 1, 2020, and is less frequently overlooked because it is filed annually around the time that other annual business tax returns are due. Finally, while the Delaware and Nevada gross receipts taxes should be noted by taxpayers, these taxes have a higher nexus and filing requirement threshold and are generally imposed on businesses with substantial revenue sourced to the state or those with a place of business in the state.[1]
These taxes share many features in common, but there are notable differences among them with respect to nexus standards, tax rates, registration requirements, and filing frequency. Each tax is discussed in further detail below.[2]
Ohio Commercial Activity Tax (Ohio CAT)
Ohio imposes a commercial activity tax on a business entity’s gross receipts in Ohio. The Ohio CAT applies to C Corporations, S Corporations, partnerships, and limited liability companies. Two or more commonly controlled corporations are required to compute the Ohio CAT either on a combined basis or by making an election to file a consolidated return.
A factor-based nexus standard applies in determining whether a business is subject to the Ohio CAT. Businesses are subject to the Ohio CAT when one of the following thresholds is met at any time during the calendar year: (1) property in the state is at least $50,000, or (2) payroll in the state is at least $50,000, or (3) taxable gross receipts sourced to Ohio are at least $500,000, or (4) at least 25% of total property or total payroll or total gross receipts are within Ohio. Out-of-state taxpayers who meet one of these tests must also have at least $150,000 of Ohio gross receipts to be subject to the tax. Businesses domiciled within Ohio with at least $150,000 of annual gross receipts are subject to the tax.
In calculating Ohio gross receipts, items that are treated as gross receipts for federal income tax purposes are treated as gross receipts for purposes of the Ohio CAT. This includes amounts realized from the sale of goods, performing services, or the use of property. Receipts that are sourced to Ohio include sales of inventory received in Ohio by the purchaser, rents and royalties received from property located or used in Ohio, and fees received in the proportion that the purchaser’s benefit in Ohio bears to the benefit everywhere. Limited exemptions are permitted, including interest, dividends and capital gains, sales returns and allowances, and bad debts.
Prior to 2024, the first $1,000,000 in Ohio gross receipts was excluded from the tax base. Ohio gross receipts over $1,000,000 were taxed at a 0.26% rate with a minimum tax of $150 on taxpayers with more than $150,000 but less than $1,000,000 in Ohio gross receipts. Taxpayers with Ohio gross receipts in excess of $1,000,000 were required to pay a higher graduated minimum tax up to a maximum of $2,600 for taxpayers with Ohio gross receipts over $4,000,000.
Legislation was recently enacted that made several changes to the Ohio CAT. For tax periods beginning in 2024, the exclusion amount is increased to $3,000,000, and the minimum tax is eliminated. For tax periods beginning in 2025, the exclusion increases to $6,000,000. Additionally, taxpayers with Ohio receipts that fall below these thresholds will not be required to file an Ohio CAT return. Annual filings are also eliminated after the 2023 annual return is filed. Only quarterly returns may be filed for future tax periods.
Tennessee Business Tax
The Tennessee Business Tax is a privilege tax, measured by Tennessee gross receipts, imposed on a person for the privilege of doing business within Tennessee and its local jurisdictions. The tax is comprised of two separate but complementary taxes: a state-level tax and a municipal-level tax. Out-of-state taxpayers are subject to the state-level tax, but a taxpayer may only be subject to the municipal-level tax if it has a business location in a municipality that has enacted the tax. The term “person” is broadly defined and includes an individual, firm, partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate, or other group or combination acting as a unit.
In order to be subject to the Tennessee Business Tax, a person must have substantial nexus with the state. The substantial nexus requirement has a bright-line presence test that applies when any of the following are met: (1) total Tennessee business receipts during the tax period exceed the lesser of $500,000 or 25% of the business’s total receipts everywhere during the tax period; (2) the business’s average value of real and tangible personal property owned or rented and used in Tennessee during the tax period exceeds the lesser of $50,000 or 25% of the average value of all the business’s total real and tangible personal property; or (3) the total amount of compensation paid by the business in Tennessee during the tax period exceeds $50,000 or 25% of the business’s total compensation paid by the business. Businesses formed and operating in Tennessee will always have substantial nexus with the state. It is not required that an out-of-state business have a bright-line presence to have substantial nexus with Tennessee. A taxpayer may have substantial nexus even if it does not meet the bright-line presence test if it has any connection with the state that requires it to remit tax under the United States Constitution.
Every person subject to the Tennessee Business Tax must register with the Tennessee Department of Revenue. In-state businesses with a Tennessee location may register for business tax directly with the Department of Revenue or with the county clerk in the county where the business is located. Businesses located in a city that has enacted a municipal business tax may register with the Department of Revenue or through the appropriate city official. Out-of-state businesses that do not have a Tennessee location but are still subject to the Tennessee Business Tax must register directly with the Department of Revenue online through the taxpayer’s Tennessee Taxpayer Access Point (“TNTAP”) account.
Persons subject to the Tennessee Business Tax may also be required to obtain a business license from the local county clerk or city official, and the license must be displayed at each business location. The local bright-line presence test for business receipts ($100,000) differs from the state threshold ($500,000). The licenses vary based on the gross sales threshold per jurisdiction. The standard business license applies if a taxpayer has $100,000 or more in gross sales, whereas a minimal activity license is required if a taxpayer has more than $3,000 but less than $100,000 in gross sales. Businesses with $3,000 or less in gross sales do not have to obtain a business license. Out-of-state businesses are typically not required to obtain a business license.
The tax base for the Tennessee Business Tax includes a business’s gross taxable sales without any deduction unless specifically provided by Tennessee law. Taxable sales may include sales of services or sales of tangible personal property but normally do not include sales of intangible personal property. Sales of certain services, such as legal, accounting, and various other professional services, are exempt from the tax. Additionally, certain deductions from taxable sales are permitted, including cash discounts, refunds for returned items, subcontractor payments, sales of services delivered to a location outside Tennessee, sales of tangible personal property in interstate commerce, bad debts related to sales on which business tax has already been paid, and miscellaneous federal and state excise taxes.
Businesses subject to the Tennessee Business Tax determine their tax rate based on their business classification as provided under state law. Each person is classified by their dominant business activity per location. There are five different classifications for taxable activities, and taxpayers should use their Standard Industrial Classification (“SIC”) to determine their classification. The tax rates range from 0.00025% to 0.001875%, and each classification has separate rates for wholesalers and retailers.
Tax returns are filed on an annual basis with a minimum tax ranging from $22 to $1,500, depending on the taxpayer’s classification. The filing deadline is April 15th for calendar year filers, and the return must be completed and filed through the taxpayer’s TNTAP account. Estimated tax payments are not required.
Have questions on state taxes? Reach out to one of our experts to find answers.
Washington Business & Occupation Tax (B&O Tax)
The Washington B&O Tax is a gross receipts tax that is imposed on a taxpayer’s gross receipts derived from business activities conducted in Washington. Taxpayers that are subject to the tax include sole proprietorships, partnerships, C Corporations, and S Corporations. In addition to the state-level tax, taxpayers should be mindful that many cities impose a local B&O tax which is not administered by the Washington Department of Revenue.
For out-of-state businesses, an economic nexus threshold applies to determine whether the business is subject to the B&O Tax. Effective January 1, 2020, a business is subject to the tax and must register an account online with the state and file tax returns if it meets any of the following thresholds in the current or prior year: (1) has physical presence nexus in Washington; (2) has more than $100,000 in combined gross receipts sourced or attributed to Washington; or (3) is organized or commercially domiciled in Washington. The nexus criteria have changed over the years, and as a result, taxpayers may be subject to different nexus standards for periods prior to January 1, 2020.
The Washington B&O Tax base includes taxable gross receipts derived from business in Washington. Taxable gross receipts normally include sales of tangible personal property delivered to customers in Washington and gross receipts from services rendered in the state. Sales to customers outside of Washington are generally not taxable. Deductions are generally not permitted for the cost of goods sold, salaries, or other costs of doing business; however, certain limited exemptions are provided, including exemptions for bad debts and sales returns, allowances, and discounts.
The B&O tax rates vary depending on the business activity of a taxpayer. The four primary business activity classifications are retailing (0.471%), wholesaling (0.484%), manufacturing (0.484%), and service and other activities (1.5%). There are also several specialized categories with their own tax rates, including categories for travel agents and manufacturers of commercial aircraft.
The Washington B&O tax is reported on the combined excise tax return, which is also used to report sales and use tax and other taxes. Both the B&O tax and sales tax apply the $100,000 economic nexus standard, so in most instances, taxpayers subject to one tax will also be subject to the other. As such, taxpayers should be mindful of the potential Washington sales tax implications that may arise from filing and paying the B&O Tax. After registering with the Washington Department of Revenue, the state will assign an account identification number and a filing frequency based on the estimated yearly income of the business. Tax returns are filed electronically through the taxpayer’s Washington tax account on a monthly, quarterly, or yearly basis. The filing frequency is determined as follows: (1) if the annual estimated tax liability is over $4,800 per year, monthly returns are required; (2) if the annual estimated tax liability is between $1,050 and $4,800 per year, quarterly returns are required; and (3) if the annual estimated tax liability is less than $1,050 per year, annual returns are required. Monthly returns are due by the 25th of every month, quarterly returns are due by the end of the month following the tax quarter, and annual returns are due by April 15th.
Oregon Corporate Activity Tax (Oregon CAT)
Oregon imposes a corporate activity tax on each person with taxable commercial activity for the privilege of doing business in Oregon. We should note that the tax being labeled as a “corporate” activity tax is a misnomer. Specifically, for purposes of the Oregon CAT, a “taxpayer” is any person or unitary group required to register, file, or pay the tax, and the term “person” is broadly defined and includes, but is not limited to, individuals, partnerships, limited liability companies, C Corporations, S Corporations, and entities that are disregarded for federal income tax purposes. Taxpayers who are members of a unitary business group must file a combined report.
The Oregon CAT is imposed on persons that establish substantial nexus with Oregon and includes a bright-line presence test. A person has a bright-line presence in Oregon if the person: (1) owns at any time during the calendar year property in Oregon with an aggregate value of at least $50,000; (2) has during the calendar year payroll in Oregon of at least $50,000; (3) has during the calendar year commercial activity, sourced to Oregon, of at least $750,000; (4) has at any time during the calendar year in Oregon at least 25% of the person’s total property, total payroll or total commercial activity; or (5) is a resident of Oregon or is domiciled in Oregon for corporate, commercial, or other business purposes.
A taxpayer or unitary group with commercial activity in excess of $750,000 in the tax year must register for the Oregon CAT with the Oregon Department of Revenue. Taxpayers must register within 30 days after the date when commercial activity exceeds $750,000, and a taxpayer who fails to register can be fined up to $100 per month or a total of $1,000 per year. Notwithstanding the nexus standards outlined above, a person or unitary group with less than $750,000 of Oregon commercial activity is excluded from all Oregon CAT registration and filing requirements.
The Oregon CAT tax base includes all of the taxable commercial activity of a taxpayer, which generally includes the fair market value of all amounts realized in the regular course of a taxpayer’s trade or business that meets the “transactional” test for apportionable business activity. Unlike other state gross receipts tax regimes, the OR CAT offers several exclusions from the tax base are permitted including returns and allowances, most interest income, receipts from the sale of assets under sections 1221 or 1231 of the Internal Revenue Code, dividends received, distributive income from a pass-through entity, and receipts from transactions among members of a unitary group.
Oregon allows a subtraction from the tax base for 35% of the greater of the amount of cost inputs or labor costs paid or incurred in the tax year. The subtraction may not exceed 95% of the taxpayer’s commercial activity in Oregon. Additionally, taxpayers with commercial activity in and outside Oregon must apportion the amount of the subtraction after providing for any exclusions, generally by multiplying the subtraction by the sales factor. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in Oregon during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.
A taxpayer or unitary group with Oregon commercial activity of $1,000,000 or more must file a tax return. The tax imposed is a flat $250 plus a 0.57% tax rate imposed on Oregon commercial activity over $1,000,000. The tax is imposed on an annual basis, and the tax return is due by April 15th, following the close of the tax year. Calendar-year taxpayers who expect to owe tax of $5,000 or more must make quarterly estimated payments that are due by April 30th, July 31st, October 31st, and January 31st.
Delaware Gross Receipts Tax
Delaware imposes a gross receipts tax on every person who is required to obtain an occupational license, which is typically for every business with a “place of business” in the state. The term “person” includes an individual, partnership, firm, cooperative, corporation, or any association of persons acting individually or as a unit.
For tax purposes, the term “gross receipts” does not have a singular definition that applies to all taxpayers. Gross receipts are calculated based on the “tax type” or industry to which a taxpayer belongs. For example, persons engaged in manufacturing calculate gross receipts by including all proceeds received for products manufactured in whole or in part within Delaware, where such products are sold to another person. Deductions are not allowed for the cost of property sold, the cost of materials used, labor costs, interest, discounts paid, delivery costs, federal or state taxes, or other expenses unless expressly allowed under Delaware law.
The tax rates range from 0.0945% to 1.9914%, depending on the taxpayer’s industry classification. Manufacturers are taxed at a rate of 0.126%, while taxpayers engaged in “general services” are taxed at a rate of 0.3983%. This tax is in addition to the annual license fee of $75 for each place of business, with an additional $25 fee often imposed for each additional establishment. Exclusions from the gross receipts tax base are permitted for most persons and vary depending on the tax type classification. The exclusion amounts typically range from $100,000 per month up to $1,250,000 per month.
Tax returns and payments are due either monthly or quarterly, depending on a person’s gross receipts for the lookback period. The “lookback period” is the twelve-month period between July 1 and June 30 immediately preceding the taxable year for which a taxpayer is determining the filing frequency. Taxpayers that do not exceed $1,500,000 in gross receipts for the lookback period must file on a quarterly basis with the return and payment due on or before the last day of the first month following the close of the quarter. All other taxpayers are required to file returns and pay tax on a monthly basis on or before the 20th day of each month to report gross receipts for the prior month.
Nevada Commerce Tax
Nevada imposes a commerce tax on business entities, and the tax is based on the amount of gross revenue attributed to the state. The term “business entity” is broadly defined to include corporations, S Corporations, partnerships, limited liability companies, and individuals who are self-employed. Business entities that are engaged in business in Nevada with gross revenue that exceeds $4,000,000 in the fiscal year are subject to the tax.
The tax base is calculated by determining a taxpayer’s Nevada gross revenue. “Gross revenue” comprises the total amount realized from engaging in business in Nevada before any deductions and includes gross revenue from the sale or lease of real property located in Nevada, gross revenue from the sale or lease of tangible personal property to a customer located in Nevada, and gross revenue from the sale of services to the extent that the purchaser’s benefit is in Nevada. Limited deductions are allowed, including deductions for distributive shares of income from pass-through entities, certain dividends received, certain types of interest income, and receipts from the sale of assets under sections 1221 or 1231 of the Internal Revenue Code.
The tax rates range from 0.051% to 0.331% depending on the industry in which the business is primarily engaged. For example, the tax rate for manufacturers is 0.091%, while the tax rates for retail trade and wholesale trade are 0.111% and 0.101%, respectively. The tax is applied to Nevada’s gross revenue for the fiscal year which exceeds $4,000,000.
Tax returns are filed on an annual basis and are due within 45 days of the end of the state’s fiscal year, which runs from July 1st through June 30th. For most tax years, the return will be due no later than August 14th. If the due date falls on a weekend, the return is due the next business day. Estimated payments are not required.
State Gross Receipts Taxes Summary Chart
[1] See enclosed gross receipts tax overview detailing any relevant minimum taxes and state-specific exclusions.
[1] See enclosed gross receipts tax overview detailing any relevant minimum taxes and state-specific exclusions.[2] Please note that municipalities may also impose a local-level gross receipts tax.
Have questions on state taxes? Reach out to one of our experts to find answers.
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Bennett Thrasher’s state & local tax practice is ready to help you mitigate your risks in this progressively uncertain tax landscape. For more information, you can contact one of our State & Local Tax Patners: Stephen Bradshaw, Peter Stathopoulos, Brian Sengson, DiAndria Green, or call 770.396.2200.
[1] Please note that the State of Texas imposes the Texas Franchise Tax, which some tax practitioners consider to be a gross receipts tax and others an income-based tax. This tax is unique in that it is imposed on a taxpayer’s Texas-sourced margin and permits deductions that are not allowed under other gross receipts tax regimes. A discussion of the Texas Franchise Tax is outside of the scope of this alert.
[2] It should be noted that several local jurisdictions impose gross receipts taxes, including, but not limited to, Los Angeles (CA), Philadelphia (PA), Portland (OR), San Francisco (CA), and certain cities in the States of Tennessee and Washington. Additionally, many localities require businesses to obtain licenses to operate within the jurisdiction, and the fee for obtaining or renewing the license may be based on gross receipts. A discussion of these taxes is beyond the scope of this alert.
