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Legal Definitions - gross-receipts tax
Simple Definition of gross-receipts tax
A gross-receipts tax is a tax imposed on the total revenue a business earns from its sales of goods or services. It applies to the full amount received before any deductions for business expenses or costs of operation.
Definition of gross-receipts tax
A gross-receipts tax is a type of business tax levied on the total revenue a company generates from its sales of goods or services, without allowing for deductions of business expenses. Unlike an income tax, which is calculated on a company's net profit (revenue minus expenses), a gross-receipts tax applies to the entire amount of money received by the business before any costs, such as salaries, rent, or materials, are subtracted.
Example 1: A Local Landscaping Business
Imagine "Green Thumb Landscaping," a small business that earns $100,000 in a year from mowing lawns, planting gardens, and tree trimming. If the state imposes a 1% gross-receipts tax, Green Thumb Landscaping would owe $1,000 ($100,000 x 0.01) in tax, regardless of how much they spent on fuel, equipment, or employee wages. This illustrates a gross-receipts tax because the tax is calculated on their total earnings, not on their profit after expenses.
Example 2: A Manufacturing Company
"SteelStrong Manufacturing" produces metal components and sells $5 million worth of products annually. Even though SteelStrong spends $4 million on raw materials, factory overhead, and employee salaries, a state with a 0.5% gross-receipts tax would require them to pay $25,000 ($5,000,000 x 0.005). The tax is based on their $5 million in total sales, not on their $1 million profit.
Example 3: A Technology Consulting Firm
"InnovateTech Solutions," a software consulting firm, bills clients $2 million for its services in a fiscal year. If the jurisdiction has a 0.25% gross-receipts tax, InnovateTech would pay $5,000 ($2,000,000 x 0.0025). This tax is applied to the full $2 million in client billings, even if the firm has significant operational costs like highly paid consultants, office space, and software licenses.