End the Confusion About Gross Receipts Taxes
- Mar 26, 2016 | Gene Marks
Some online sellers don’t have to remit sales taxes.
Yes. That’s right. Some online sellers don’t have to collect and remit sales taxes because their states don’t require them to do so.
Before you scream “unfair!” or “yeah!”, you must know that states that don’t require collection of sales taxes impose a distinct, but similar, type of tax.
For states like New Mexico, there are indeed no sales taxes. What they have is called gross receipts taxes.
Like sales taxes, gross receipts taxes are usually included in the final price upon checkout.
Okay, so, what’s the difference between sales taxes and gross receipts taxes?
Sales Taxes vs. Gross Receipts Taxes
Here’s the main difference between the two.
Based on tax rates and rules, sellers charge sales taxes on top of their selling price. The customer pays the final price, which is the selling price plus sales taxes. The seller now reports and remits sales taxes they’ve collected.
In this situation, the seller just collected sales taxes on behalf of the state.
For example, you have nexus in New York, and you’re selling bags at $20 each to buyers also from New York. According to tax rules of the state, you’d have to collect sales taxes at the rate of 8.875 percent. The buyer will be notified upon checkout that the price includes sales taxes and will be asked to pay a total of $21.77 for a bag.
Gross Receipts Taxes
On the other hand, states that impose gross receipts taxes instead of sales taxes do not require sellers to collect taxes from buyers. If you’re a seller in such a state, you’re responsible to pay gross receipts taxes out of your earnings. The concept is that a certain percentage of your total revenue or gross receipts for each sale has to be paid to the state as tax.
For example, you have nexus in New Mexico, and you’re selling bags at $20 each to buyers in New Mexico. Buyers will pay $20 for each bag. From there, you remit 5.125 percent or $1.02 to the state as gross receipts tax. This tax comes out of your revenue and is not collected from the buyer.
For this reason, if you’re an online seller who lives in a state that imposes gross receipts taxes instead of sales taxes, you need to consider gross receipts taxes when computing how to price your products.
Does My State Charge Gross Receipts Taxes?
Not in New Mexico? Here's a rundown of states that impose or plan to impose gross receipts taxes.
- Like New Mexico, Delaware imposes gross receipts tax and doesn't collect sales tax.
- Hawaii collects gross receipts tax but calls it general excise tax (GET). There's no sales tax in Hawaii.
- Alabama, Florida, and Pennsylvania all impose gross receipts tax on businesses in certain industries like telecommunications, electricity, and transport -- however, ecommerce businesses are not included.
- Ohio charges commercial activity tax (CAT) on all annual gross receipts and also collects sales taxes.
- Gross receipts tax collection is proposed in Illinois but it hasn’t been approved as of this posting. The state currently collects sales tax.
What Else Do I Need To Know?
It is perfectly legal to take gross receipts taxes into consideration when deciding on product prices that make sense for your business. It is common practice to pass the gross receipts taxes on to buyers through a separate line on the invoice or by combining it with the selling price.
However, sellers need to know that gross receipts taxes passed on to consumers are added to their total taxable income.