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State Taxation of Gross Receipts: Minimizing Tax in

Oregon, Texas, Ohio, Nevada, Delaware, and Others

THURSDAY, NOVEMBER 21, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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November 21, 2019

State Taxation of Gross Receipts

Stacey L. Roberts, CPA, State and Local Tax Director

TaxOps, Denver

sroberts@taxops.com

Judith B. Vorndran, JD, CPA, MSBA, Partner

TaxOps, Denver

jvorndran@taxops.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

State Taxation of Gross Receipts: Minimizing Tax in

Delaware, Nevada, Ohio, Oregon,

Texas, Washington, and OthersPresented by Stacey Roberts, CPA, and

Judy Vorndran, CPA, Esq.

Presented by

• Specializing in designing tax strategies and solutions that improve business tax outcomes

• 20+ years of public and private sector accounting experience, both practical and in management, she’s gained the essential business acumen necessary to be a key advisor to clients

• Managing all compliance issues related to state income/franchise, SALT, real and personal property and unclaimed property taxes for flow through entities and C corporations; identifying planning opportunities and state and local credits and incentives; and, mitigating state and local tax controversy issues

• Frequent speaker and instructor on SALT issues for industry and professional organizations including the Denver Tax Institute, Product PowerUp, NowCFO and more.

Stacey Roberts, CPA303-393-2318

sroberts@taxops.com

TaxOps.com

6

Presented by

• Leads the state and local tax (SALT) practice at TaxOps, helping clients navigate the morass of SALT issues with the goal of making it less “Taxing!”

• 3-year appointment to Colorado’s legislative Sales and Use Task Force to help simplify its complex sales tax system

• Dually licensed attorney and CPA, Judy is also president of the Colorado Chapter of the American Academy of Attorney-CPAs

• Nationally recognized thought leader and award-winning instructor

• Successfully changing laws in states and local jurisdictions and promoting simplicity

Judy Vorndran, CPA, Esq.720-227-0093

jvorndran@taxops.com

TaxOps.com

7

AG

EN

DA

Taxation of gross

receipts

Oregon CAT in 2020

Texas

Delaware, Nevada,

Ohio, Washington

& Others

Best practices to

reduce taxes

8

Banking the cannabis industry

Taxation of Gross Receipts

9

Overview

• Gross receipts taxes (GRTs), also known as turnover taxes, are a revenue

option for states

• GRT is a tax on business, unlike the VAT, which is a tax on consumers

• GRTs generally don't deduct expenses, exceptions exist

• Increasingly popular charge by states; broad tax base brings large, stable

source of revenue

• Nexus Standards

• Physical presence not always required

• Some states use factor-based presence

• P.L. 86-272 does not apply

• NOLs are not considered

10

Overview

• Various businesses subject to GRTs; exemptions exist

• Various names used: corporate activity tax, franchise tax, margins tax,

commerce tax, etc.

• GRT can be charged multiple times on the same product and to businesses

operating at a loss

• B2B transactions not exempt from GRT, creating tax pyramiding

• GRTs impact firms with low profit margins and high production volumes, as

the tax does not account for costs of production

11

Trends

• States were doing away with these taxes, now a resurgence

• In 2017, only five states had statewide gross receipts tax

• Delaware, Nevada, Ohio, Texas, Washington

• In 2020, Oregon implements gross receipts tax

• Additional states are considering proposals

• Local GRTs exist in several states

12

Banking the cannabis industry

Oregon CAT in 2020

13

Oregon Overview

Corporate Activity Tax (CAT)

• Effective Jan. 1, 2020

• CAT tax of 0.57% on taxable receipts less deductions, layered onto

corporate net income excise tax and gross receipts-based minimum

tax

• <$1 million of Oregon receipts (minimum tax of $250)

14

OregonWhat Creates Nexus

• Tax applies to "persons" with "substantial nexus"

• Physical & economic presence tests• Owns or uses part or all capital in Oregon

• Holds a certificate of existence or authorization issued by Secretary

of State

• Payroll of >$50,000

• Property valued at >$50,000

• Receipts of >$750,000 Oregon-sourced activity

• <25% of total payroll, property, or sales in the state

• Persons • <$750,000 in Oregon sales are expected to register with DOR but

will not have CAT liability until $1 million in Oregon revenue

15

OregonDuty bound

• Business entities subject to CAT• Corporations

• Individuals

• Joint ventures

• LLC, including disregard entities

• Limited liability partnerships

• Partnerships and trust

• Imposed on all industries• Except credit unions, hospitals and long-term care facilities, not-for-

profit and government entities

16

OregonDefinitions

• Commercial activity is defined as “the total amount realized by a

person, arising from transactions and activity in the regular course of

the person’s trade or business, without deduction for expenses incurred

by the trade or business”

• Taxable when sourced to Oregon

• Real property

• Tangible personal property

• Tangible personal property sales

• Services Intangible property

17

Oregon Calculation

• Gross receipts sources using corporate income/excise tax

apportionment and market-based sourcing method:• CAT assessed on receipts of $1 million and above, after a 35% deduction for

certain costs; and,

• Calculated as $250 plus .57 percent of "calculated taxable commercial

activity".

• Subject to unitary reporting rules

• Apportioned subtractions cannot exceed 95% of a taxpayer’s Oregon-sourced

receipts

18

OregonExclusions

• 43 excludible gross receipts, including:• Industry exclusions for gas and fuel sales, groceries, utilities, telecommunication

service providers and vehicle dealers

• Intercompany transactions among unitary group members

• Interest and dividend income, unless received by a financial institution

• Sales of IRS section 1221 and 1231 assets

• Sales to Oregon wholesalers to be sold outside Oregon

• A partner/shareholder’s distributive share of income from a passthrough entity

19

OregonNuances

• P.L. 86-272 does not apply

• Taxpayer may request an alternative sourcing method that better

reflects their commercial activity

• Property delivered elsewhere and brought into the state within a year

must be reported

• Combined filing requirements may apply (unitary, 50% common

ownership)

• Foreign entities may be deemed taxable under CAT

• Quarterly payments of 80% tax due in month after quarter end; annual

returns due April 15

• Exceptions for financial institutions and insurers

20

Banking the cannabis industry

Texas

22

Texas

Texas Margin Tax or Franchise Tax• Tax rates, thresholds, and deduction limits change annually

• A tax rate of .75% applies to "most entities"

• Entities with less than $1,000 in tax due or with less than $1,130,000 annualized

total revenue owe no tax

• Entities still required to file the No Tax Due Report

• Determining when a return is due and which period to include in the return can be a

challenge

Taxable Margin is based on max of four amounts

• 30% of total revenues

• $1 million

• COGS

• Compensation

Combined reporting is required for entities that are unitary and more than 50% owned

23

Texas

• Entities Subject to Tax • Corporations

• Limited Liability Companies (LLCs), including series LLCs

• Banks

• State limited banking associations

• Savings and loan associations

• S corporations

• Professional corporations

• Partnerships (general, limited and limited liability)

• Trusts

• Professional associations

• Business associations

• Joint ventures

• Other legal entities

24

TexasNot Subject to Tax

• Sole proprietorships (except for single member LLCs)

• General partnerships where direct ownership is composed entirely of natural

persons (except for limited liability partnerships)

• Entities exempt under Subchapter B of Chapter 171, Tax Code

• Certain unincorporated passive entities

• Certain grantor trusts, estates of natural persons and escrows

• Real estate mortgage investment conduits and certain qualified real estate

investment trusts

• A nonprofit self-insurance trust created under Chapter 2212, Insurance Code

• A trust qualified under Section 401(a), Internal Revenue Code

• A trust exempt under Section 501(c)(9), Internal Revenue Code or

unincorporated political committees

25

TexasNot Subject to Tax

• Passive Entities Partnerships (general, limited and limited liability)

and trusts (other than business trusts)

• Have at least 90% of the entity’s federal gross income (as reported

on the entity’s federal income tax return), for the period upon

which the tax is based, from certain sources

• Not subject to tax

26

TexasTax Rates

• Tax Rates The franchise tax rates for reports originally due on or after

Jan. 1, 2016

• 0.75% (0.0075) for most entities

• 0.375% (0.00375) for qualifying wholesalers and retailers

• 0.331% (0.00331) for those entities with $20 million or less in

annualized total revenue using the EZ computation

27

TexasCOGS Computation

• COGS deduction allowed to taxpayers who acquire or produce goods,

defined as real or TPP for sale

• Include only costs related to goods the taxpayer owns

Direct Costs

100% Deductible

Indirect Costs

Limited to 4%

Excluded Costs

Not Deductible

• Labor

• Materials

• Handling

• Storage

• Depreciation

• Repairs

• Property taxes paid

• Administrative

• Legal

• Accounting

• Financial services

• Officer’s comp

• Advertising

• Marketing

• Distribution costs

• Income taxes

28

TexasNuances

• Compensation deduction

• No tax due threshold adjustment to $1,130,000 after Jan. 1, 2018 to

Jan. 1, 2020

• Note, threshold changes yearly

29

Banking the cannabis industry

Washington

30

WashingtonOverview

Business & Occupation (B&O) tax• Activity based tax

• Measured on the value of products, gross proceeds of sales, or gross

income of your business

• Economic nexus thresholds

• B&O thresholds set at $285,000 in combined sales, $57,000 of

payroll or property

• Sales tax thresholds are $100,000 in retail sales or

• 200 transactions

• Effective Jan. 1, 2020• All thresholds will be $100,000 in combined sales

• Property, payroll and transaction thresholds are eliminated

• Nexus is determined based on the current or previous year’s data

• Trailing nexus period remains at one year

• No P.L. 86-272 protection

31

WashingtonEstablishing Nexus

• Most common activities subject to economic nexus thresholds

• Imposed on all business entities

• No consolidated or combined reporting

• Applies to all levels of a transaction and is meant to pyramid

• Rates for various sales• 48 B&O classifications

• 12 B&O tax rates ranging from .13% - 3.3%

• 77 different B&O exemptions

• 77 B&O deductions

• 13 B&O Credits (codified)

• 45 cities within Washington have their own B&O Tax

32

Washington• Common classifications and tax rates

• Wholesaling .00484

• Retailing .00471

• Manufacturing .00484

• Service and other .015

• Many preferential rates available to special industries

• Common exemptions

• Accommodation sales

• Farming

• Sale or rental (less than 30 days) of real estate

• Common deductions

• Interstate and foreign sales

• Apportionment

• Cash discounts

• Bad debts

• Casual sales

• Common credits

• Small business B&O credit

• Multiple activities tax credit

Tax Rate

X Taxable Gross Receipts

= Tax Due

33

WashingtonDefinitions for each B&O tax classification

• Different rates

based on B&O tax

classifications • Source: Washington DOR

34

Washington

Sourcing of sales• Tangible personal property: based on where delivery takes place

• Retail services: Varies; primarily where the customer takes delivery or service is put to use

• Service and other activities: based on where benefit is received

• Caution! Can be the location of the customer’s customer in some circumstances

Complex tax regime• Many of the lower B&O rates, exemptions, deductions and credits are only found in the statutes

• Many times the DOR auditors are unaware

35

WashingtonWashington State DOR

Very aggressive, with the staff to back it up!

• 50 Auditors dedicated to auditing out of state companies

• 175 auditors auditing Washington businesses

• Represents 31% of tax recovery

• Full staff dedicated to searching for non-reporting Businesses

Recent legislation

• Use tax notice reporting

• Began Jan. 1, 2018, repealed March 14, 2019

• Applies to remote sellers and marketplace facilitators

• Significant penalties for non-compliance–penalty waiver is available at the DOR’s

discretion for taxpayers who agree to begin collecting and remitting sales tax as of Oct.

1, 2018

Economic nexus

• Services–began June 1, 2010

• Wholesaling–began Sept. 1, 2015

• Retailing–began July 1, 2017

• Retail sales tax–began Oct. 1, 2018

36

Banking the cannabis industry

Delaware, Nevada, Ohio and Others

38

Delaware

• Delaware's Gross Receipts Tax is a tax on the total gross revenues of a

business, regardless of their source

• Levied on the seller of goods or services, rather than on the consumer

• Tax rates currently range from .0945% to .7468%, depending on the

business activity

• Must be "Doing business" in Delaware

39

Delaware

• Basic GRT type tax - no deductions for COG/property sold, material or labor

costs, interest, discounts, delivery, taxes, or any other expenses

• Exclusions -vary depends on business activity - start at $100,000 per month to

$1,250,000

• No GRT on goods shipped outside of DE, GRT due if pick up or delivery in

Delaware, regardless of ultimate destination

• Wholesale business - subsequent delivery and consumption outside of DE

use Form 373 Wholesale Exemption Certificate prior to or concurrent with sale

• Administered like sales tax - due monthly/quarterly, depends on total gross

receipts

• www.revenue.delaware.gov

40

NevadaCommerce Tax

• Includes 27 varying rates based on business category

• Imposed on revenue of at least $4 million annually

• Fees range from .051% to .331%

• Unclassified business rate of .128%

41

OhioCommercial Activity Tax

• Annual tax - measured by gross receipts from business activities

in Ohio

• Minimum of $150,000 or more per calendar

• Register file and pay

• Applies to all types of businesses: e.g., retailers, service

providers (such as lawyers, accountants, and doctors),

manufacturers, and other types of businesses

• CAT applies whether business is located in OH or outside if

taxpayer has enough business contacts with this state

• CAT applies to all entities regardless of form, (e.g.,

sole proprietorships, partnerships, LLCs, and all types of

corporations)

42

Others

California• Los Angeles Business Tax (LABT)

• Many CA city business license taxes modeled after LABT

• Taxpayers engaged in any trade, calling, occupation, vocation, profession or other

means of livelihood in Los Angeles must obtain a tax registration certificate (TRC)

and pay the LABT

• Needs physical presence (employees, property, or agents) for 7+ days a year

• Exemptions include newly registered businesses, business with <$100,000 in taxable

and non-taxable gross receipts

• Creative artists with <$300,000 in taxable and nontaxable gross receipts

• Entities exempt under CA constitution

• Qualified charitable organizations, airlines, government agencies, notary publics, and

others

• Audit risk increases with non-filing, late returns, closing of tax account, changes in tax

calculation method, and large tax payments

43

Others

California• San Francisco

• Voters imposed an additional gross receipts tax on businesses with receipts of

more than $50 million beginning January 1, 2019

• Layered on top of the gross receipts tax that was phased in from 2014 to 2018 to

replace the city’s payroll tax

• Derived from sales, services, dealings in property, interest, rent, royalties,

dividends licensing fees, other fees, commissions, distributed amounts from other

business entities

• Applies to business with > $1.12 million in San Francisco gross receipts in the

preceding year, with some exceptions (banks, financial institutions, and companies

subject to the administrative office tax are exempt)

• Methods based on industry

• Apportionment (payroll factor)

• Allocation (sales factor)

• 50% apportionment and 50% allocation

44

Others

Pennsylvania• Local Business Privilege or Mercantile Taxes (BPT) on net income base

• Either 5% or 5.9% for most applicable industries

• Imposed upon private bankers (1%); pipeline, conduit, steamboat, canal,

slack water navigation and transportation companies; telephone, telegraph

and mobile telecommunications companies; electric light, waterpower and

hydroelectric companies; express companies; palace car and sleeping car

companies; and freight and oil transportation companies

• City of Philadelphia -Business Income and Receipts Tax, portion based on

gross receipts

• City of Pittsburgh – Business Privilege Tax Return

45

Complicating Factors

• Is it a gross receipts tax or income tax?

• Is the gross receipt type tax captured with the income tax filing or

separate?

• Kentucky• Utility gross receipts license (UGRL) for schools

• Assessed on gross receipts derived from the furnishing of utility services and/or cable

services within a school district

• Service provider collects the tax based on the rate established by the local authority

• Rate cannot exceed 3%

46

Banking the cannabis industry

Best Practices to Minimize Taxes

47

Best Practices

• Minimize GRTs charged by states

• Categorize business correctly

• Ensure business meets criteria for nexus

• Understand what cost deductions are allowed

• Texas allows deductions for specific costs

• Recognize that some states require business registration and

minimum fees, even when the business is below the GRT threshold

for taxation

48

Banking the cannabis industry

Q&A

49

Banking the cannabis industry

Let’s stay connected

Stacey Roberts, CPAsroberts@taxops.com

303.393.2318

Judy Vorndran, CPA, Esq.jvorndran@taxops.com

720.227.0093

TaxOps.com

50