The Delaware gross receipts tax, which is similar to sales tax, is applied to a wide range of transactions to increase state tax revenues.

Many states struggle with fiscal problems, including flawed tax systems and expensive government programs. In order to address these issues, officials are searching for new revenue generation methods that can be implemented without writing new laws. A gross receipts tax is a method of generating revenue that has become increasingly attractive to these states in recent years.

Gross Receipts Tax vs. Sales Tax

Gross receipts taxes differ from common sales taxes because while regular sales taxes usually only apply to retail transactions, a gross receipts tax applies to company sales that are made throughout the process of production.

No matter the source of a transaction, a gross receipts tax is levied against the money a company receives from selling its services or goods. Depending on the nature of the business, the gross receipts tax can be between 0.1037 percent and 2.0736 percent.

Consider how these taxes may apply to a product like a chair. With a simple retail sales tax, only the consumer that purchases the chair is required to pay taxes, with the amount the customer must pay reflected on their sales receipt.

With a gross receipts tax, every step of the chair's production is subject to taxation, including the cost of the lumber and any machinery used, the transaction between the manufacturer that produced the chair and the wholesaler that will sell it to the customer, and the sale of the chair to the consumer.

Generally, the total cost of gross receipts taxes is passed on to the consumer, either in part or in whole, usually without any indication to the consumer that the tax exists. Fortunately, the rate for gross receipts taxes is generally very low. In Washington, for instance, the top tax GRT rate is 1.5 percent and is applied depending on what goods or services the business in question provides.

In certain states, online sellers aren't required to impose a sales tax on their customers. For states where sales tax isn't collected, a similar type of tax is levied. For example, New Mexico, does not have a sales tax, makes up the lost revenue with the gross receipts tax.

Gross receipts taxes are included in the final cost of an item, similar to sales taxes. A sales tax will usually be added to the listed price on an item, which is based on the tax rules and rate of the state where the item is being sold. After the customer has paid the sales tax, the seller reports the taxes and then provides them to the state.

If your business is selling goods in New York to New York consumers, for example, your business would need to add an 8.875 percent sales tax to every item sold. For items being sold for $20, this would result in a final price of $21.77 after the tax has been added.

When a state uses a gross receipts tax instead of a sales tax, the taxes are not collected from consumers. Sellers in states that use a GRT must pay these taxes out of the money the business has earned from sales. A portion of the total money the business has earned, called its gross receipts, will be paid in taxes to the state. If you're selling an item in New Mexico for $20, the customer would pay the listed price, and then your business would pay the state $1.02 — a 5.125 percent tax.

Online sellers that offer goods in states that use a gross receipts tax should take this different tax structure into account when determining the price of their goods.

Delaware Taxation

Although Delaware is one of just five states without sales tax, it is the only one of those five that instead imposes a gross receipts tax. Many consider this a hidden sales tax, and it represents the fifth largest revenue source for the state. However, you'll never see this tax identified on a receipt. Instead, it is added to an item's sticker price. Consumers who cross state lines to avoid sales tax might instead pay a higher price for the goods they buy in Delaware.

Delaware limited liability companies (LLCs) are subject to a $300 state tax each year. Otherwise, they are taxed based on federal LLC taxation laws.

Advantages of Broad-Based Gross Receipts Taxes

Some advantages of the gross receipts tax include:

  • More revenue is collected by the state thanks to a broader tax base.
  • Gross receipts tax is not based on income, so it is not as easily avoided with schemes.
  • A gross receipts tax is easier to levy against out-of-state businesses.

Unlike traditional corporate income taxes, it is much easier to collect tax revenue from out-of-state businesses using gross receipts taxes.

It is possible, however, for gross receipts taxes to be manipulated, as was the case in Ohio and Washington where certain businesses were able to lobby for exemption.

Effect of GRTs on Taxpayers

Low-income individuals are disproportionately affected by GRTs, as they are devoting a much larger portion of their income to taxes than wealthier taxpayers are. These taxes do not account for a business's ability to afford them, meaning that if your business does not turn a profit, you are still required to pay GRT. High-volume, low-profit-margin businesses are also negatively affected by this type of tax. Businesses with high-profit margins, on the other hand, often benefit through lower taxes with a GRT than with corporate income tax.

Because this tax is applied at all production phases, materials and supplies are taxed more than once, a phenomena known as "pyramiding." In Washington, for example, an analysis of gross tax receipts found an average of 2.5 pyramiding on each item.

GRTs are typically not disclosed to taxpayers and are instead rolled into the prices of the goods and services they purchase. This lack of transparency can skew their ability to make economic decisions.

In addition, this form of tax can hurt local suppliers as businesses may opt for out-of-state suppliers to avoid an imposed GRT.

If you need help understanding how the Delaware gross receipts tax may impact your business, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.