Commercial activity income is a tax term for a business’s gross receipts, the total revenue it takes in before any deduction for expenses. Seven states impose a tax on this base: Ohio, Oregon, Texas, Washington, Nevada, Delaware, and Tennessee. Because the tax applies to revenue rather than profit, a business can owe it in a year it loses money, and the same dollar of economic value can be taxed several times as goods move through a supply chain.
How It Differs from Income Tax and Sales Tax
A traditional income tax starts with total revenue and then subtracts payroll, materials, rent, depreciation, and other costs to arrive at taxable profit. A business that breaks even or loses money generally owes nothing. A gross receipts tax skips that subtraction. It applies to total revenue with few or no deductions for business expenses.1Tax Policy Center. How Do State and Local General Sales and Gross Receipts Taxes Work
The difference from a retail sales tax matters just as much. Sales tax is collected from the consumer at the register and remitted by the retailer. A gross receipts tax is imposed directly on the business, and it applies to transactions at every stage of production, not just the final retail sale.1Tax Policy Center. How Do State and Local General Sales and Gross Receipts Taxes Work Sales taxes usually exempt business-to-business purchases. Gross receipts taxes typically do not.
The cost still often reaches the buyer through higher prices, but it does so invisibly. A sales tax shows up as a line item on a receipt. A gross receipts tax gets embedded in the price and never surfaces.
Tax Pyramiding
Because the tax hits every transaction in a supply chain, the same economic value gets taxed repeatedly as raw materials become components, components become finished goods, and finished goods reach consumers. A retail sales tax avoids this by taxing only the final sale. A gross receipts tax does not.2Tax Foundation. Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
The effect is that the true tax rate on a consumer purchase is often two or three times the statutory rate, depending on how many hands the product passed through. Longer supply chains produce higher effective rates.
Pyramiding also falls hardest on thin-margin businesses. A grocery distributor operating on a 2% margin pays the same statutory rate as a software company on a 40% margin, but the tax eats a far larger share of the distributor’s actual earnings.2Tax Foundation. Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
The Seven States and Their Rates
Each state uses its own name, rate schedule, and threshold.3Tax Foundation. Gross Receipts Taxes by State
- Ohio’s Commercial Activity Tax is a flat 0.26% on taxable gross receipts. Starting in 2025, only businesses exceeding $6 million in annual Ohio gross receipts owe the tax, a sharp increase from the old $150,000 threshold.
- Oregon’s Corporate Activity Tax is $250 plus 0.57% of Oregon commercial activity above $1 million. Oregon allows a subtraction for certain labor costs and a portion of cost inputs, making its base slightly narrower than a pure gross receipts tax.
- Texas’s Franchise Tax runs from 0.331% to 0.75%, with lower rates for wholesalers, retailers, and businesses using the EZ computation. Texas allows a cost-of-goods-sold or compensation deduction, giving it hybrid qualities.
- Washington’s Business and Occupation Tax varies by classification, from under 0.14% to as high as 3.3% for specialized activities. Retailing is taxed at about 0.471%, manufacturing and wholesaling at about 0.484%, and most service businesses at 1.5% or higher.
- Nevada’s Commerce Tax applies to businesses with more than $4 million in Nevada gross revenue. Rates run from 0.051% to 0.331% depending on business category.
- Delaware’s Gross Receipts Tax runs from roughly 0.1% to 0.75% depending on the type of business, with higher rates for retailers and contractors.
- Tennessee’s Business Tax has the lowest rates in this group, from 0.02% to about 0.19%.
The spread across states is wide. A service business in Washington can face a rate five or six times higher than a manufacturer in Tennessee, and thresholds range from Oregon’s $1 million to Ohio’s $6 million.3Tax Foundation. Gross Receipts Taxes by State
What Goes into the Tax Base
The starting point is total gross receipts from all business activity. Each state’s law then carves out specific exclusions. Getting these right matters because the rates are low enough that overpayment often goes unnoticed, while underpayment triggers penalties on audit.
Common Exclusions
Most gross receipts states exclude proceeds from selling long-term business assets like machinery, vehicles, or real estate used in operations. These are occasional capital transactions rather than the recurring commercial activity the tax targets. Investment income and dividends are also commonly excluded.
Intercompany transactions within a consolidated group typically get excluded as well. If a parent charges a management fee to a wholly owned subsidiary, that receipt can be eliminated when the group files as a consolidated taxpayer. Without this exclusion, the same dollar would be taxed multiple times within a single economic entity.
Some states offer more targeted exclusions. Oregon allows businesses to exclude receipts from sales to wholesalers who resell the product outside the state, provided the wholesaler furnishes an out-of-state resale certificate at the time of sale. Others exclude certain agricultural products, government contracts, or specific regulated industries. The lists are highly specific to each statute.
Bad Debts
Revenue billed but never collected is treated differently than under an income tax. Some states allow a deduction for uncollectible amounts, but only if the revenue was previously reported as gross receipts and the business can show it took reasonable steps to collect. Other states offer no adjustment at all, meaning the business pays tax on revenue it never received. The default assumption from income-tax experience does not carry over, so check each state’s rule.
Sourcing Sales Across State Lines
For businesses selling into multiple states, the critical question is which state gets to tax which receipts. Sourcing determines where a particular sale is located; apportionment allocates the overall tax base among states.
Services: Market-Based Sourcing
Roughly three dozen states use market-based sourcing. Receipts from services are sourced to wherever the customer receives the benefit, not where the provider performs the work. A consulting firm in New York advising an Ohio-headquartered client sources those receipts to Ohio regardless of where the consultants sat.
A handful of states still use the older cost-of-performance method, which sources service receipts to wherever the provider incurred the most costs. Businesses selling services across multiple states can face conflicting sourcing rules that leave the same receipts taxed by more than one state, or occasionally by none.
Tangible Goods
Physical products follow a destination rule. The sale is sourced to wherever the buyer receives the goods after shipping is complete. A manufacturer in Nevada shipping to a retailer in Texas sources those receipts to Texas.
Records You’ll Need
Market-based sourcing forces businesses to track granular customer data. Shipping records usually cover goods. For services, you need documentation showing where the customer received the benefit, which often means reviewing contracts, understanding the customer’s operations, and allocating receipts across multiple locations when a customer has offices in several states. Estimates get challenged on audit. Building the tracking into your systems before filing season is far cheaper than reconstructing it during an examination.
Nexus and Why PL 86-272 Doesn’t Help
A business does not need a physical office or employee in a state to owe its gross receipts tax. States set their own revenue thresholds for economic nexus, and a business selling nationwide may trigger filing obligations in several gross-receipts states at once.
Here is where companies most often get caught. Federal law under Public Law 86-272 prohibits states from imposing a net income tax on companies whose only in-state activity is soliciting orders for tangible goods that are approved and shipped from outside the state.4Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax Many businesses rely on this protection to avoid state income tax where they have no physical footprint.
That protection does not extend to gross receipts taxes. The statute limits its scope to taxes “measured by net income.” Ohio’s Commercial Activity Tax, Washington’s Business and Occupation Tax, Nevada’s Commerce Tax, and the other gross receipts taxes are not measured by net income, so the shield does not apply. A company that comfortably avoids state income tax under PL 86-272 can still owe gross receipts tax in the same state once it crosses the economic nexus threshold. Overlooking this is one of the most common and expensive mistakes in multistate compliance.
Federal Deductibility
State gross receipts taxes are generally deductible on your federal return as a cost of doing business. The federal code allows a deduction for state and local taxes paid or accrued in carrying on a trade or business, which extends beyond the enumerated categories of property, income, and personal property taxes.5Office of the Law Revision Counsel. 26 US Code 164 – Taxes For pass-through entities, the deduction flows through to the owners’ returns. This offsets some of the sting of paying tax on revenue rather than profit, though it does not eliminate it, especially for businesses already operating at a loss.
Registration, Filing, and Penalties
A business that crosses a state’s gross receipts threshold must register with that state’s tax department, usually through an online portal, using its Federal Employer Identification Number and basic entity information. Waiting too long to register can trigger penalties even if you eventually file and pay on time. Monitor revenue against each state’s threshold throughout the year.
Most states require quarterly returns. Ohio’s Commercial Activity Tax returns, for example, are due on the 10th of the second month after each calendar quarter ends: May 10, August 10, November 10, and February 10. Other states follow their own schedules, and some vary filing frequency by taxpayer size. If you drop below a state’s threshold, you may still need to file zero-dollar returns until you formally cancel your registration. Idle registrations invite non-filing penalty notices.
Payments are almost always required electronically. Statutory rates are low, but the gross receipts base means the dollar amount can be significant for high-revenue, low-margin businesses. Late-payment penalties usually escalate the longer you wait, and many states also charge a flat fine for each late return regardless of whether tax was owed. Businesses that discover prior-period exposure may be able to reduce penalties through a state’s voluntary disclosure program, which typically waives some penalties in exchange for coming forward before an audit begins.