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Delaware Gross Receipts Tax

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September-October 2009 Delaware Gross Receipts Tax By Mark D. Olson and Vincent C. Thomas Mark Olson and Vincent Thomas summarize the concepts and recent developments associated with Delaware's gross receipts tax. applicable to taxpayers doing business within theelaware's state.' comprehensiveThe license taxation license scheme taxes hasare two components: the taxpayer must pay: (i) a flat annual fee for its business license; and (2) a variable tax based on its total gross receipts. For convenience, in the balance of this article these two components are referred to as the "annual fee" and the "gross re- ceipts tax," respectively. While the concept of license taxation is fairly consistent for all taxpayers, both the amount of the annual fee and the gross receipts tax rate2 vary depending upon the type of business. The license tax statutes generally provide for four broad license categories with specific businesses being covered within each category. The four broad categories are': (1) Occupational License Tax,4 (2) Contractors' License Tax,' (3) Manufactures' License Tax, 6 and (4) Retail and Wholesale Merchants' License Taxes' (the foregoing sometimes collectively referred to herein as the "License Categories").' The annual fee isgenerally a modest amount, currently $75 in most cases. Some taxpayers, however, are subject to a more substantial annual fee but exempt from any gross receipts tax.9 Ingeneral the license period isone cal- endar year but the taxpayer may elect to renew a license for a three-year period.'0 If the initial license year is less than 12 months, the license fee will be prorated based on the short license year." Failure to obtain a license may result in a $3,000 fine, imprisonment for up to two years, or both.'1 In addition, in some circumstances the Mark D. Olson is a partner with the law firm MorrisJames, Director of Revenue may revoke or decline to renew a LLP in Wilmington, Delaware. Vincent C. Thomas is an as- license, effectively preventing a person from carrying sociate with the same firm. Both authors practice primarily in on business within the State of Delaware.'" and estate planning. the areas of taxation, business planning, The gross receipts tax imposed upon all taxpayers More detailed information about the authors can be found at www.morrisjames.com. doing business within the state is more complex and 02009 M.D. Olson and V.C. Thomas 45 Delaware Gross Receipts Tax is the focus of the balance of this article. But the Recent Developments discussion which follows is a general summary of the concepts, with the expectation that the reader Two recent cases provide guidance on the expansive will understand that the important specifics such scope of Delaware's gross receipts taxes. In Director of as the tax rate and the deduction amount vary de- Revenue v. Dial," and Ford Motor Company v. Direc- pending upon the type of license. tor of Revenue 9 the Delaware Supreme Court found While the definition of gross receipts varies with- that physical delivery of goods in the State of Delaware in the License Categories, except for the specific subjected Dial and Ford to the wholesaler gross receipts statutory deductions provided below, the statutory tax despite the fact that title to the goods passed outside term "gross receipts" generally includes all gross the State of Delaware. Among other things, Dial and receipts of a taxpayer from goods sold or delivered Ford claimed that such application of the gross receipts or services rendered within the State of Delaware tax violated the "dormant" aspect of the Commerce without deduction for Clause of the U.S. Constitu- the "cost of property In both cases, the Delaware tion "that denies the States sold, the cost of materi- the power to exact more als used, labor costs, Supreme Court, citing the U.S. than their fair share from interest, discount paid, Supreme Court case of Tyler interstate commerce than delivery costs, federal or Pipe Industries v. Washington State would be commensurate state taxes or any other with the burden imposed expense whatsoever paid Department of Revenue, found the by that activity."" In both 4 or accrued or losses..." Delaware gross receipts tax to cases, the Delaware Su- The gross receipts tax satisfy the requirements of the preme Court, citing the Supreme Court case is due either monthly Commerce Clause. U.S. or quarterly depending of Tyler Pipe Industries v. upon the taxpayer's busi- Washington State Depart- ness type and the amount of the taxpayer's gross ment of Revenue,1 found the Delaware gross receipts receipts during the "lookback period."" tax to satisfy the requirements of the Commerce Clause.2 Two statutory deductions provided in the Dela- Notably, Ford has petitioned the U.S. Supreme Court for 23 ware Code include a flat deduction which varies a writ of certiorari which remains pending. depending upon the type of license and a deduc- Delaware has also recently adopted a Voluntary tion for receipts from related entities. For example, Tax Compliance Initiative (VTCI) which applies to a wholesaler's flat deduction is generally $80,000 gross receipts taxes as well as other taxes.2 4 Under the per month, while a general manufacturer is allowed VTCI, penalties and interest will be waived for taxpay- a flat deduction of $1 million per month.6 30 ers who voluntary file returns between September 1, Del. C. § 2120(b) defines related entities to mean 2009 and October 30, 2009 or who pay eligible taxes either of the following: (i) entities in which eighty the assessment of which is final before September 1, percent of the value of the interests in each entity 2009 or enter into payment plans to pay such eligible are owned, directly or indirectly, by the same five taxes before June 30, 2010. In addition, the Director of or fewer individuals; or (ii) entities in which 100 Revenue will not assess any tax, interest, or penalty for percent of each entity is owned by members of the any voluntary tax return reporting eligible taxes under same family. 7 the VTCI for tax periods before January 1, 2004. Delaware also offers gross receipt tax phase-ins The VTCI could be beneficial for taxpayers who for particular License Categories. For example, have not previously filed gross receipts tax returns. 30 Del. C. § 2012 offers a 120 month phase-in The addition of penalties and interest, 2 and Dela- for taxpayers making a $200,000 qualified invest- ware's position on assessing to the year in which the ment in a qualified facility employing five or more tax was enacted, can convert even a modest gross qualified employees. In addition, phase-in will receipts tax liability, into a substantial obligation.2 occur over 180 months if the qualified facility is Taxpayers with outstanding gross receipts tax expo- in certain targeted areas and the rules are even sure should consider theVTCI to prevent assessment more liberal if the qualified facility is located in for periods prior to January 1, 2004. a brownfield. Continued on page 63 46 September-October 2009 or by any means, electronic or mechani- reorganizations of state gov- cal, including by photocopying, facsimile CninI6uedUfromSiSpag 3 ernment, including a DOR "to transmission, recording, re-keying or using reduce duplicative entities." any information storage and retrieval sys- Unfortunately, it is unclear tem without written permission from Grant Thornton LLP. businesses when dealing with bad how long this new budget agree- Tax professional standards statement. or missing taxpayer identifica- ment will keep the state budget This document supports the marketing of tion numbers. It is estimated this balanced because it includes a professional services by Grant Thornton LLP. It is not written tax advice directed requirement of improved com- number of deferrals, one-time at the particular facts and circumstances pliance will result in an annual measures, and rosy revenue as- of any person. Persons interested in the revenue gain of $26 million. sumptions. With a continuing subject of this document should contact Grant Thornton or their tax advisor to decrease in state tax revenues, discuss the potential application of this Budget Bill Provisions there is likely another shortfall subject matter to their particular facts and to be addressed before the end circumstances. Nothing herein shall be year. As a result, construed as imposing a limitation on any Franchise Tax Board of this calendar person from disclosing the tax treatment or m Reduces by $4.8 million and it is likely the Legislature will be tax structure of any matter addressed. To 69 positions the FTB's bud- called into another special session the extent this document may be consid- get to reflect the suspension in November. ered written tax advice, in accordance with applicable professional regulations, unless of the Senior Citizens' and expressly stated otherwise, any written Disabled Homeowners and advice contained in, forwarded with, or Renters Assistance Program. attached to this document is not intended or written by Grant Thornton LLP to be Funding for payments under used, and cannot be used, by any person the program was vetoed in for the purpose of avoiding any penalties the current year and was not formal representations from DOR that may be imposed under the Internal an appeal Revenue Code. included in the 2009 Budget staff, we anticipate that 1 Manpower, Inc. v. Wisconsin Dept. of Rev- Act. This reduction recognizes will be filed. It is our understand- enue, Wisconsin Tax Appeals Commission, administrative savings due to ing that the DOR policy has not Docket No. 05-S-046, Aug. 12, 2009. changed relating to assessing sales 2 Wis. STAT. §77.52(1). program suspension. 3 Wis.
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