A gross receipts tax is a tax on the total money a business brings in, before any costs are subtracted

Unlike a sales tax, which the customer pays at checkout, a gross receipts tax is paid by the business itself on every dollar of revenue it receives. The business owes the tax whether it made a profit or lost money that year. A retailer with $500,000 in sales pays tax on the full $500,000, even if after paying employees, rent, and suppliers it ended the year with no profit.

This is the core difference that makes gross receipts taxes controversial. A sales tax is a single tax collected once, at the point of sale. A gross receipts tax can be collected multiple times on the same dollar as it moves through a supply chain — the manufacturer pays it, then the wholesaler pays it on the same goods, then the retailer pays it again. This stacking effect can make the real tax burden much higher than the stated rate.

Gross receipts taxes exist in a handful of states and cities. Nevada, New Mexico, and Washington have versions of them. Some cities, including Las Vegas and Albuquerque, use them as their primary business tax. They are less common than income taxes or sales taxes, but they generate significant revenue for the places that use them.

Key Takeaways

  • A gross receipts tax is paid by businesses on total revenue, not by customers at the register, and the business owes it regardless of whether it made a profit.
  • The same dollar can be taxed multiple times as it passes through a supply chain, which can make the effective tax rate much higher than the stated percentage.
  • Gross receipts taxes are used in Nevada, New Mexico, Washington, and some cities like Las Vegas and Albuquerque, but are less common than sales or income taxes.
  • Businesses with low profit margins, like grocery stores or gas stations, are hit harder by gross receipts taxes than businesses with high markups.

How the tax is calculated and who pays it

The business calculates gross receipts by adding up all money received from selling goods or services during a tax period, usually a month or quarter. Deductions for cost of goods sold, employee wages, rent, or other operating expenses do not reduce the taxable amount. Some states allow narrow deductions — Nevada, for example, lets businesses subtract the cost of goods they resold — but most gross receipts taxes explore to the full revenue number.

The tax rate varies by state and city. Nevada's rate is 1.575 percent on most businesses. New Mexico's rate ranges from 0.75 percent to 1.9 percent depending on the type of business. Washington's Business and Operations Tax, which is a form of gross receipts tax, has rates between 0.471 percent and 1.75 percent. These rates are applied to the gross receipts figure, and the business sends the payment to the state or city revenue department on a regular schedule.

A sole proprietor, partnership, corporation, or LLC all owe the tax if they operate in a state or city that has one. There is no exemption based on business size, though some states exempt certain industries — nonprofits, agricultural producers, or financial institutions may be excluded depending on the jurisdiction.

Why gross receipts taxes create a cascading effect

The cascading problem occurs because the tax is not collected once and then removed from the economy. Imagine a manufacturer buys raw materials for $100 and pays gross receipts tax on the $100. The manufacturer then sells the finished product to a wholesaler for $200. The manufacturer paid tax on $100, but the wholesaler now pays tax on $200 — the same $100 of materials is taxed again. The wholesaler sells to a retailer for $300, and the retailer pays tax on $300. The same $100 of original materials has now been taxed three times.

This cascading effect means the true tax burden is much higher than the stated rate suggests. A 1 percent gross receipts tax can effectively become 2 or 3 percent when you account for all the stages of production and distribution. Businesses that operate in multiple states or cities with gross receipts taxes face even steeper cumulative burdens.

Industries with long supply chains or many intermediaries — manufacturing, wholesale distribution, agriculture — feel this effect most acutely. Businesses with short chains or that sell directly to consumers experience less cascading.

How gross receipts taxes affect different types of businesses

A grocery store with $2 million in annual sales and a profit margin of 2 percent (typical for groceries) owes gross receipts tax on the full $2 million, even though it only keeps $40,000 as profit. If the rate is 1.5 percent, the tax bill is $30,000 — which is 75 percent of the store's actual profit. A software company with the same $2 million in revenue but a 40 percent profit margin ($800,000 profit) pays the same $30,000 tax, which is only 3.75 percent of its profit.

This disparity is why gross receipts taxes are often criticized as regressive — they hit low-margin businesses much harder than high-margin ones. Retailers, restaurants, gas stations, and utilities all operate on thin margins and bear a disproportionate tax burden. Professional services, consulting, and software companies can absorb the tax more easily.

Businesses sometimes pass the tax forward to customers through higher prices, but this is not always possible. A grocery store in a competitive market cannot straightforward raise prices 1.5 percent without losing customers to a store across the border. A utility company with a regulated monopoly can often pass the cost through to ratepayers.

How gross receipts taxes differ from sales tax and income tax

A sales tax is collected once, at the point of sale, and is paid by the customer. The retailer collects it and sends it to the state. The same dollar is taxed only once. A gross receipts tax is paid by the business on revenue and can be taxed multiple times as goods move through the supply chain.

An income tax is paid on profit — the money left after all expenses are paid. A business that breaks even or loses money owes no income tax. A gross receipts tax is paid on revenue regardless of profit, so a business can owe tax in a year it lost money.

From a revenue perspective, gross receipts taxes are more stable than sales taxes because they do not depend on consumer spending. They are also harder to avoid through tax planning because they explore to all revenue. However, they create economic distortions by taxing the same transaction multiple times, which is why many economists view them as inefficient compared to sales taxes or income taxes.

States and cities that use gross receipts taxes

Nevada has used a gross receipts tax since 1955 as its primary business tax, with rates ranging from 0.75 percent to 1.575 percent depending on the industry. The state has no personal income tax, so the gross receipts tax is a major revenue source.

New Mexico's Gross Receipts Tax applies to most businesses at rates between 0.75 percent and 1.9 percent. Like Nevada, New Mexico has no personal income tax and relies on the gross receipts tax for state revenue.

Washington's Business and Operations Tax (B&O Tax) is structured as a gross receipts tax with rates between 0.471 percent and 1.75 percent depending on business classification. Washington also has no personal income tax.

Several cities use gross receipts taxes in addition to or instead of sales taxes. Las Vegas, Albuquerque, and some smaller municipalities have local gross receipts taxes. The rates and rules vary by city, and a business may owe both state and local gross receipts taxes.

Frequently Asked Questions

Can a business deduct operating expenses from gross receipts before calculating the tax?

In most states with gross receipts taxes, no. The tax applies to total revenue, not profit. Nevada allows a deduction for cost of goods sold in certain cases, but wages, rent, utilities, and other operating expenses do not reduce the taxable amount. This is what makes the tax so different from an income tax.

If I buy something wholesale and resell it, do I pay gross receipts tax twice?

Yes, in most cases. The wholesaler pays tax on the sale to you, and you pay tax on the sale to your customer. This is the cascading effect. Some states allow a deduction for goods resold to avoid this, but the rules vary by jurisdiction.

Does a business owe gross receipts tax if it operates at a loss?

Yes. Gross receipts tax is based on revenue, not profit. A business that brings in $500,000 in sales but spends $600,000 on expenses still owes tax on the full $500,000. This is a major difference from income tax.

Are there industries exempt from gross receipts taxes?

Some industries are exempt in certain states. Nonprofits, agricultural producers, and financial institutions may be excluded depending on the state. A few states also exempt certain types of sales, like sales for resale. Check your state or city's revenue department website for the specific exemptions that explore.

How does a gross receipts tax affect prices consumers pay?

Businesses may pass the tax forward to consumers through higher prices, but this depends on market conditions. A business in a competitive market may not be able to raise prices without losing customers. A regulated utility can often pass the cost through to ratepayers. The effect on consumer prices varies by industry.