Why charge gross receipts taxes to the customer?

Question

I live in New Mexico where we have "gross receipts tax", and there's a notion that this tax is "charged to the customer". For instance, when I see a TV that is on sale for $100, I'll really end up paying $107 because I'll be charged an extra $7 at the purchase counter for "gross receipts tax".

My question is simple. Why do we bother charging gross receipts tax fees at the sales counter instead of adjusting our prices?

As I understand it, gross receipts tax is imposed on your gross revenue. As the seller of the TV in the example above, I have made $107 total. The state will tax me $7.49 (7% of $107). So, in spite of the extra $7 the customer payed "for tax", I'm short 49 cents to the state. It is therefore impossible for the customer to pay gross receipts, so why do we pretend they do?

There are other taxes that companies pay as well, such as income tax, but don't charge to the customer as a fee. So, why are gross receipts taxes charged to the customer?

Answer 1

the state of New Mexico provides guidance in this exact situation.

On page 4:

Gross receipts DOES NOT include:

1. Tax billed to the buyer (i.e., gross receipts tax, governmental gross receipts tax, leased vehicle gross receipts tax, interstate telecommunications gross receipts tax and local option taxes).

Example: When the seller passes tax to the buyer, the seller should separate, or “back out”, that tax from the total income to arrive at "Gross Receipts," the amount reported in Column D of the CRS-1 Form. (Please see the example on page 48.)

and on page 48:

How do I separate (“back out”) gross receipts tax from total gross receipts?

See the following examples of how to separate the gross receipts tax:

1) To separate (back out) tax from total receipts at the end of the report period, first subtract deductible and exempt receipts, and then divide total receipts including the tax for the report period by one plus the applicable gross receipts tax rate.

For example, if your tax rate is 5.5% and your total receipts including tax are $1,055.00 with no deductions or exemptions, divide $1,055.00 by 1.055. The result is your gross receipts excluding tax (to enter in Column D of the CRS-1 Form) or $1,000.

2) If your tax rate is 5.5%, and your total gross receipts including tax are $1,055.00, and included in that figure are $60 in deductions and another $45 in exemptions:

a) Subtract $105 (the sum of your deductions and exemptions) from $1,055. The remainder is $950. This figure still includes the tax you have recovered from your buyers.

b) Divide $950 by 1.055 (1 plus the 5.5% tax rate). The result is $900.47.

c) In Column D enter the sum of $900.47 plus $60 (the amount of deductible receipts)*, or $960.47. This figure is your gross receipts excluding tax.

Answer 2

I'll address one part of your question:

There are other taxes that companies pay as well, such as income tax, but don't charge to the customer as a fee. So, why are gross receipts taxes charged to the customer?

Things like income tax can't be passed on to the consumer in a direct way, because there's no fixed relationship between the amount of the tax and the price of an individual product. Income tax is paid on taxable income, which will incorporate deductions for the costs the company incurred to do business. So the final amount of corporate income tax can depend on things unrelated to the price of goods sold, like whether the business decided to repave their parking lot.

Gross receipts taxes, by definition, are charged on the total amount of money taken in, so every dollar you spend on an item at the store will be subject to the gross receipts tax, and hence will cost the business 7 cents (or X% where X is the tax rate). This means there is a direct link between the price you pay for an individual item and the tax they pay on that transaction. The same is true for sales taxes, which are also often added at the time of sale.

Of course, businesses could roll all of these into the posted price as well. The reason they don't is to get their foot in the door and make the price seem lower: you're more likely to buy something if you see it for the low, low, one-time-only price of $99.99, act now, save big, and then find out you owe an extra $7 at the register than if you saw $107 on the price tag.

Answer 3

It sounds like "gross receipt tax" is essentially the same thing most states call "sales tax", which is always handled this way -- prices displayed are pre-tax, tax is added when the final price is calculated.

One reason for doing it that way is that most prices result in taxes that involve fractions of pennies, and calculating from the total produces a more accurate result than calculating tax on each item individually.

It is theoretically possible to set prices so the numbers come out evenly when tax is added. But that requires that the prices be in fractional cents, potentially to many decimal places.

And in fact in some places it is illegal to display (only) the with-tax price. Otherwise I'm sure some stores and restaurants would be willing to deal with the mils and micros, purely on principle or as a marketing gimmick.

Since customers have learned to expect sales tax, it really isn't worth the effort to fight it. The closest I've seen has been occasional "we'll pay your sales tax" offers, or statewide sales-tax holidays once a year.