DLO / Sunday, April 1, 2007 / Categories: Springfield Business Journal Article, Blog Post The Governor's Gross Tax Proposal In his Budget Address in March Governor Rod Blagojevich proposed the biggest tax increase in Illinois history. The largest portion of the tax increase will come in the form of a gross receipts tax on Illinois businesses, which the governor says will cause "large and multi-national corporations to have to pay their fair share of taxes." As any business owner knows, gross sales are no indication of profitability. Every business has gross sales. If you weren't selling anything, you would close your doors. However, not every business makes a profit, and for many who do, the profit constitutes a fair wage on which they are already paying taxes. For example, assume Joe owns two convenience stores in Springfield which gross $2,000,000. Joe doesn't take home $2,000,000. Joe has to pay for inventory, employee wages, health insurance, rent, utilities, taxes, professional fees and many other expenses. Joe might take home $150,000 for his efforts. If Joe's business is a sole proprietorship, limited liability company or S corporation, then it will pay no federal or state income taxes. However, Joe will pay personal federal and state income taxes on 100% of his profit. If the gross receipts tax is implemented as proposed by the governor, Joe will owe $36,000 in new taxes (1.8% of $2,000,000). Joe has just lost 24% of his income. Joe now has several choices. He can live with his reduced income, raise his prices, cut costs (possibly by laying off employees) or relocate to another state. None of those choices seems like a good one. Joe is hardly a large, multi-national corporation, but his is the type of business that will be devastated by the gross receipts tax. The governor implies that Joe is somehow shirking his responsibilities to the State of Illinois by paying no corporate tax, when, in fact, the purpose of S corporations and limited liability companies is to allow the shareholders of these companies to pay tax at the personal level rather than the corporate level. This has been an acceptable method of taxation for decades. (Subchapter S of the Internal Revenue Code was adopted in 1958.) In addition, although Joe's business might not pay state income tax, it will pay many other taxes. If Joe's business is an S corporation, it will pay Illinois replacement tax of 1.5% of income. (C corporations pay replacement tax of 2.5%.) Regardless of the business structure, the business will pay payroll taxes, sales tax, property tax, telecommunications tax, and many other taxes. The gross receipts tax will adversely affect service businesses. Most accounting firms, law firms, etc. are organized as S corporations, partnerships or limited liability companies. Although the gross receipts of these businesses may seem high, most of those receipts are paid out in salaries to the people who provide the services. The governor is saying that all of these people should pay 1.8% of their gross receipts to the state and an additional 3% of their salaries in personal income taxes. The gross receipts tax may also force businesses to close. A business may have gross receipts of more than $1,000,000, but it may still be losing money. Start-up businesses or businesses that are struggling will not be able to afford additional taxes. Again, if there is no profit, there is no money to pay taxes regardless of the amount of sales. I spoke to the owner of a local trucking company. His business had sales in 2006 of approximately $2,000,000. The business is already being hit hard by cost increases. Fuel costs rose 6% from 2005 to 2006, insurance costs rose 7.7%, and state license fees rose 82.5% due to Governor Blagojevich's changes involving trucking companies. The company had a profit in 2006 of $38,000. If the governor's plan passes, this company will owe $36,000 in gross receipts tax. The owner will receive no return on his investment. He would be better off selling the assets and investing the proceeds. If he chooses to do that, 15 people will be out of work and more than 20 independent contractors will be affected. Some businesses may be able to restructure themselves so that they are not subject to the gross receipts tax. In my example above, Joe could operate his two convenience stores as separate businesses. If each business grossed less than $1,000,000, then neither would be liable for the gross receipts tax. This result is inefficient and certainly isn't fair to the trucking company if it cannot be easily subdivided. The discussion above does not even include the additional payroll taxes the governor is proposing to fund his health insurance programs. Governor Blagojevich says that the current Illinois "tax system is archaic and ignores the realities of today's economy." That may be true, but taxing businesses on gross receipts and calling it fair is about as far from reality as you can get. Previous Article The Tax Gap What is it and what does it mean to you? Next Article DUI - Know Your Rights Print 672