![]() ![]() This article re-evaluates myths and realities of turnover taxes, including their purported benefits and drawbacks. The turnover tax is not to be confused with a gross receipts sales tax, which is intended to be a vendor-based sales tax, although both are measured by gross receipts. The tax base is “turnover” and the measure of the tax is “gross receipts.”Ī turnover tax applies to both services and tangible items ranging from sales of business inputs to sales to end users alike in essence it taxes business activity, whereas a retail sales tax is intended to tax consumption and should apply only to the end user. The resulting gross receipt is subject to tax. A gross receipts or turnover tax is levied every time a good or service “turns over,” that is, transferred from one entity to another for consideration. Gross receipts taxes in other states do not follow corporate apportionment formulae.Turnover taxes have a storied history dating back to ancient Athens, and are starting to make a comeback in the States. ** Texas’ Margin Tax, a gross receipts tax, uses single sales factor apportionment. * State offers alternative apportionment factors as well, either as an optional election or as a requirement for select industries State Primary Apportionment Factors for Tax Year 2020 Three-Factor (6) This is known as market or benefit sourcing and contrasts to sourcing rules that emphasize the location where a greater proportion of a company’s income-producing activity takes place. Twenty-six of the 45 corporate income-taxing states emphasize, in varying ways, the location where a service’s benefit is received. Sales of tangible property are sourced to the destination of the sale, but accounting for the sale of services is more complex. In other words, single sales factor apportionment reduces tax burdens for businesses that have most of their property and payroll in the state but only a small proportion of their national sales in the state, while increasing tax burdens for out-of-state companies that have minimal property or payroll in the state but a large proportion of their national sales in the state. Many states have adopted single sales factor apportionment as a way to “export” the state’s corporate income tax burden. A company’s payroll and property in a state are more closely related to its operations there, the costs they impose, and the benefits they receive from good governance, but all states include sales into the state as a factor, and the majority (29 states) use it as the sole factor. There is not an obviously “correct” approach to corporate apportionment. The apportionment formula must ensure that no more than 100 percent of a corporation’s income would be taxed if every state chose the same formula-even if, in practice, the interaction of differing standards can yield double taxation (internal consistency).The tax must bear some rational relationship to companies’ activities in the state (external consistency) and.Courts have granted states substantial leeway in adopting competing approaches to apportionment but some requirements must be met, most notably: Increasingly, many states have shifted to single sales factor apportionment, where only a company’s sales are taken into account, with the intention of benefiting in-state production while exporting more of the tax to foreign (out-of-state) companies. ![]() ![]() The traditional evenly weighted three-factor apportionment method weighs property, payroll, and sales in equal measure. ![]()
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