CCH Tax News Headlines - January 7, 2010

How does a net receipts tax work? If you buy stuff for $10 and sell it for $15, is the tax on $15 or on $5? If you sell the $10 item for $8, is the tax negative and do you get money back? What if you didn't manage to sell the $10 item at all? I kind of remember about universal capitalization rules which say that labor and other direct costs, including shipping, are added to the cost price of the item.

Net receipts tax is a tax on net receipts. Never mind if you didn't make a profit.

California's proposed BNRT would be gross receipts net of certain inputs. However, interest expense and employee labor would not be subtracted from gross receipts as part of the calculation.

As I see it, a relatively few California taxpayers pay the vast majority of California personal income taxes, and when the economy takes a dip, California's tax revenues take a dip. This scheme seeks to make tax revenues more stable, by taking taxes from businesses (like those owned by the relatively few taxpayers currently paying the vast majority of California personal income tax), and tax them in good times and bad, profit or no.

In your scenarios, buy for $10 and sell for $15, $5 is taxed.

I didn't see any discussion of if you lost money, I doubt they have thought that far ahead, or that you would get money back. They want your money.

another scenario: You buy something for $5, have labor costs of $10, and sell it for $12. You pay tax on $12-$8 = $4, but you have lost $3. You loose! But, the state needs your money.

Here is a rosy scenario, without a whole lot of thought:

Right. But only the ultimate consumer is normally taxed. If you buy for resale, you don't pay tax at that time.

But it's a regressive tax, because it falls more heavily upon the poor. They will normally pay a higher percentage of their income on taxes than more wealthy people who can save and invest.

As you noted above, net receipts means net receipts, not net profit. Since $15 is received, the tax should be on that amount. On the other hand I haven't seen the legislation, so I don't know what it actually says.

Losing money should be irrelevant because (if it's like the current sales tax) it's only imposed on the ultimate consumer.

And you don't add the tax to the sale price? If you can, it's not a problem for the seller.

Wrong. This is a business net receipts tax. Each business pays tax on its net receipts.

The ultimate consumer is taxed only if the tax can be passed along in price. That is hard to do, for example, for a landlord with a lease in place. It may also be hard to do when someone has the choice of buying goods out of state (for example someone living out of state).

How did you get $8?

thought:

The tax would be based on net receipts, calculated by subtracting purchases from the gross receipts of the firm. It would apply to all forms of business including C corporations, pass-through entities and sole proprietorships.

The quote seems to say it is net sales minus cost price (and cost price includes labor costs, shipping costs, etc where applicable). On the other hand, I don't know how official the above website is.

Then again, the senate has 25 democrats, 14 republicans, 1 vacant; the assembly has 48 democrat, 32 republican, 1 independent -- so I don't think these taxes would pass.

labor costs are not subtracted when determining the net receipts to be taxed.

well, that and I guess I changed my scenario mid-stream and goofed. $12-$5=$7 taxable BNRT, even though you have a loss of $3.

That's _gross_ receipts, isn't it?

Wouldn't that be tax on $12-$5 = $7?

If you can, why didn't you already raise the sale price?

Seth