LeAnn Luna of the University of Tennessee, Knoxville discusses alternatives to the traditional corporate income tax, such as the gross receipts tax, the margins tax, the subtraction method value-added tax and the credit invoice value-added tax

1. Evaluating New State Forms of
Taxing Business
LeAnn Luna, Professor of Accounting
December 4, 2015

2. What’s Wrong with the Corporate Income
Tax?
• Are profits the appropriate tax base?
• Complicated, high administrative and
compliance costs
• Volatile
• Shrinking tax base
• Shift of business activity to LLCs and other pass
through entities
• State level erosion from changes in Federal tax base
• State economic incentives
• Sophisticated tax planning

3. Connecticut’s Revenue Performance
CIT versus Total Taxes
1,000.0
3,000.0
5,000.0
7,000.0
9,000.0
11,000.0
13,000.0
15,000.0
17,000.0
19,000.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1,000.0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
TotalStateTax(thous)
CorporateNetIncomeTax(thous)
CIT Total State Taxes

4. Tax Base Examples Description
Gross
Receipts Tax
Ohio,
Washington,
Nevada
Gross receipts
Margins Tax Texas, Kentucky - Gross receipts minus labor
- Gross receipts minus COGS
- 70% of gross receipts
Subtraction
Method Vat
Proposed in
California
Gross receipts minus
purchases from other firms
Credit
Invoice VAT
Europe Gross receipts minus labor,
depreciation, interest,
purchases from other firms
Corporate
Income Tax
Imposed on
U.S. C-corps in
45 states
Gross receipts minus labor,
depreciation, interest,
purchases from other firms,
other operating exp.
Broad Base
Narrow Base
Taxonomy of Business Taxes
Low Rate
High Rate

5. Gross Receipts Tax
• Imposed on all forms of business, including
partnerships and LLCs.
• Period tax on the value of total sales.
• Often exclude interest, dividends, proceeds from
the sale of stock.
• No deduction for business inputs.
• Generally imposed on a destination basis.
• Sometimes functions as a form of minimum tax
(e.g. the New Jersey AMA on out of state
corporations with NJ receipts).

6. GRT Advantages
• Low rate, broad base; rates are below 1%.
• Tax return fits on a post card.
• Typically a privilege tax and can be imposed on
every firm doing business in the state without
regard to nexus.
• Not subject to P.L. 86-272
• More stable than CIT across business cycles.
• Decouple from federal tax law changes.
• Tax planning is difficult.

7. GRT Disadvantages
• Imposed on firms losing money, startups, etc.
• Disadvantages high volume, low margin businesses
such as grocers, wholesalers, discount retailers, etc.
• Pyramiding
• Study of Washington State’s B&O tax indicated it
pyramided from 1.5 times for services to over 6 times for
food manufacturing.
• Encourages vertical integration
• Low rates mitigate pyramiding and vertical
integration problem.
• “Above the line” deduction for financial reporting
purposes.

8. Gross Margins Tax
• Similar to the GRT, but allows deductions for
some business inputs, such as cost of goods
sold.
• Raw materials, parts, direct labor
• Eliminates some of the pyramiding.
• Allowing deductions for purchased inputs moves
the tax closer to a tax on consumption ultimately.
• Deductions open the door for tax planning.
• Treated as an income tax for GAAP purposes
• Deduction from operating income (“below the line”).

9. Value Added Taxes
• Imposed on all business regardless of form.
• The VAT can be accomplished using a
subtraction or addition VAT.
• Addition VAT = payroll + rent +interest +firm profit
• Subtraction VAT = gross receipts – all purchases from
other businesses. No deduction for in-house labor.
• Types
• Income variant – capitalized and deducted when sold
(inventory) or depreciated (capital assets).
• Consumption variant – all items fully deductible in the
year purchased, no inventory, no depreciation
deductions.

10. Alternative Taxes in NE Region
• Delaware GRT
• Annual exclusion starts at $100,000 per month
• Rates range from 0.1006% to 0.7543%
• New Hampshire BET
• Base = Wages + interest + dividends
• Rate = 0.75%
• BET paid is credited against the business profits tax
• New Jersey AMA
• Applies only to taxpayers not subject to income tax
• Tax on gross profits
• Alternative minimum taxes in general
• Most AMT regimes will fall on the continuum between GRT and
the income tax.

11. Other Considerations
• Apportionment
• Combined reporting
• Transitional rules and treatment of various tax
attributes.
• Financial accounting considerations.