Background
A trend of concern in state taxation is the gross receipts tax (GRT). Texas enacted a tax of this nature, the Margins Tax, in 2006. Kentucky and Ohio (the “Commercial Activity Tax”) did so in 2005 and Michigan in 2007 (repealed in 2011). A GRT was proposed in Illinois in 2007. A GRT generally is levied as a small percentage of all the revenue of a business entity minus either the cost of goods sold or cost of employee compensation.
GRTs appeal to revenue-strapped states because they are very broad-based, raise large amounts of revenue, and are largely invisible to individual taxpayers. Some corporations may prefer GRTs to paying income tax. For MLPs, however, GRTs are very dangerous, because, as seen in Texas, they are generally imposed on all businesses regardless of structure, thus imposing an entity level tax on MLPs and other partnerships. Although the tax rate is usually quite low, the cumulative effect if several states impose GRTs could substantially reduce the tax advantage that MLPs currently enjoy.
GRTs are hard to lobby against because MLPs are placed in the position of asking for an exemption that is afforded to very few, if any, other businesses. In addition, their provisions are often not well tailored to the revenues and costs of particular industries such as pipelines.
More Information
- A study published in January 2007 by the Tax Foundation reviews the history and performance of the gross receipts tax and concludes, “There is no sensible case for gross receipts taxation.” GrossReceiptsTaxStudy
- For the text of existing state GRT statutes, click here.
- Because so many MLPs are based or have operations in Texas, the MLPA has been involved over the years in efforts related to the Texas margins tax. For more information on the MLPA’s work in Texas click here.