Document Type



Taxation-State and Local | Tax Law


A turnover tax, more commonly known as a gross receipts tax, has a long and sordid history. The tax has ancient roots, first appearing when economies were primitive and underdeveloped, with few alternatives for raising revenue. A turnover tax makes no pretense of taxing profits, income, consumption, wealth, or other bases that have come to be accepted as legitimate around the world. Instead, it taxes business activity, and is fundamentally different in concept, and inferior to, either a well-designed retail sales tax or a value-added tax.

Economists throughout the ages have nearly universally condemned turnover taxes; some even blame the Spanish version of the tax (the “Alcabala,” first imposed in the 14th century) for that country’s downfall. The adoption of a turnover tax often led to taxpayer rebellions. Turnover taxes benefit from the myth that they are low-rate, stable, and easy to administer. The reality is quite the opposite. The many faults that infect turnover taxes have led throughout the world to their replacement by value-added taxes (or corporate income taxes). The most glaring exception is the United States, which has no value-added tax at either the federal or the sub-national levels.

Despite turnover taxes being vilified, condemned, and railed against by economists, Ohio adopted one in 2005—its commercial activities tax (CAT). Its name obscures the fact that it is a turnover tax.

Maryland recently adopted a narrow-based turnover tax on digital advertising. Maryland was inspired in part by foreign digital service taxes, a type of turnover tax designed to overcome the permanent establishment rule in tax treaties and the lack of market-based sourcing, two serious obstacles to taxing the digital economy. Those obstacles are not inherent in the state tax systems. Ironically, Maryland already eliminated the physical presence requirement from its state income tax, replacing it with an economic nexus standard, and has adopted market-based sourcing. Besides being unnecessary, the Maryland tax has numerous drafting and constitutional weaknesses and has been challenged in both federal and state courts.

Neither Maryland nor any of the other state turnover taxes (Washington, Delaware, Ohio, Texas, Nevada, Oregon, Maryland) is worthy of imitation. These states are false prophets. Hopefully, policymakers who learn of the abject history of gross receipts/turnover taxes will not be doomed to repeat it.