States have many ways to raise tax revenue from businesses: corporate income tax, franchise tax, sales and use tax, and the often-overlooked gross receipts tax (GRT).
How Gross Receipts Taxes Differ from Income Taxes
Unlike an income tax, a GRT is imposed on a company’s total revenue with limited ability to deduct the cost of goods sold or other expenses. As a result, a GRT liability is possible even in an unprofitable year. This tax is often overlooked because it is neither an income tax nor a sales tax and is far less common. For corporate income tax purposes, many pharmaceutical companies can minimize their tax liability due to Public Law 86-272, which prevents a state from taxing an out-of-state corporation if the level of activity in that state is limited to the solicitation of orders for sales of personal property. However, since a GRT is not an income tax, pharmaceutical companies typically fall outside the protection of P.L. 86-272. As a result, a company can be liable for GRT in a state where it would otherwise not be subject to corporate income tax.
Seven states currently have GRT-type regimes: Delaware Gross Receipts Tax, Nevada Commerce Tax, Ohio Commercial Activity Tax, Oregon Corporate Activity Tax, Tennessee Business Tax, Texas Franchise Tax/Margin Tax, and Washington Business & Occupation Tax.
Why Pharmaceutical Companies Face Greater GRT Risk
While GRTs impact most businesses, they can have a particularly adverse impact on pharmaceutical companies. As an industry practice, sales of pharmaceutical products are initially recorded at the Wholesale Acquisition Cost (WAC), which is the manufacturer’s list price. WAC is often significantly higher than the actual amounts received by the taxpayer due to material chargebacks issued by customers based on negotiated prices. For economic purposes, WAC is not representative of sales revenue and is often significantly higher than the final selling price. If a seller of pharmaceutical products does not actually receive the WAC list price, it becomes extremely important to understand how each state defines gross receipts, because a state may try to tax the full WAC list price rather than the net amount the seller ultimately receives. In other words, tax on revenue that was never received.
Perrigo v. Harris: A Favorable Result in Ohio
Let’s take Ohio, for example: a recent case, Perrigo Sales Corporation v. Harris[1], explored the interaction of WAC and gross receipts for purposes of Ohio’s Commercial Activity Tax. The Board of Tax Appeals upheld the taxpayer’s position that gross receipts under R.C. 5751.01(F) meant the amount actually realized (the net price after chargebacks), not the WAC. The Board reasoned that “[b]ecause the WAC is, in substance, an accounting placeholder, the chargeback reduction is not an expense but rather the accounting mechanism to establish the actual purchase price, i.e., the gross amount realized.”
The Perrigo case is a welcome result in the GRT landscape, but taxpayers should not over-rely on it, as it is state-specific. A taxpayer with identical facts in another GRT state, such as Washington, which has no comparable explicit favorable authority, could potentially be taxed on the full WAC amount. Same facts, completely different outcome.
WG Observation
The GRT systems do not follow the familiar rules of income or sales tax, and a structure that is compliant in one state can produce a large, unexpected liability in another state. Review your GRT exposure state by state, annually, to avoid being taxed on revenue you never received.
If you have any questions, please reach out to your WG advisor.
[1] Ohio BTA No. 2024-485 (10/9/25). Note at the time of this writing, the State of Ohio is appealing this case to the Ohio Supreme Court.
