DANVILLE — The notion that an Illinois gross receipts tax would only make big companies pay is not exactly true, some local business owners say.

Service industries — from auto repair shops, law firms and insurance offices to hair salons, hotels and fast-food joints — would pay a 1.95 percent tax on total revenues each year if the business does at least $2 million in annual sales.

“Two million sounds like a big number to people, but it’s really not,” said Vicki Haugen, president and CEO of Vermilion Advantage.

“You don’t have to be very big to have that kind of revenue.”

And because the proposed tax would be applied to gross revenue — before a business pays its overhead, employees and other operating expenses — rather than taxing the company’s end profit, small businesses that are just scraping by will be hurt the most.

“The thing is whether you’re making money or not, you’re still going to pay,” Haugen said.

Small business hit

GRT opponent Bob Newton, owner of Newton’s Cleaning Specialists in Danville and Catlin, said, “The cost to the business is amazing, and we’re a fairly small business.

“We’re still a mom-and-pop show.”

Newton said a service business similar to his that does $2 million in sales annually would pay $40,000 a year to the state just in gross receipts tax.

That amount, according to Newton, represents the pay for an extra employee or two at some businesses.

“The tax doesn’t care if you make a profit or not,” he said. “It comes off the top.”

David Wood, president of Time-O-Matic in Danville, likens the gross receipts tax to having a significant increase in overhead costs, and thus would make his electronic outdoor sign company less competitive.

“Illinois is not a competitive state to begin with,” he said.

“A gross receipts tax would have an unfavorable effect on our business because our major competitors are in South Dakota — a very frugal state — and China.

“It would definitely increase our costs,” Wood said.

“This gross receipts tax doesn’t help us create signs, it just comes out of our hide.”

While some businesses might be able to offset the expense of the tax by raising the price of their product or service paid by the end consumer, Newton doesn’t have that luxury in his line of work.

His business is cleaning up after fires and floods, and the price of his service is dictated by the insurance companies he works with.

Even though Newton’s annual revenue doesn’t hit the $2 million mark, he still would be affected by a gross receipts tax when he purchases supplies.

“I buy my supplies from a company in Illinois, so I’m going to pay more for them,” he said.

“The manufacturer is taxed. The distribution company is taxed. The truck that delivers it to me is taxed,” he said. “That’s the problem, (the cost) just keeps upscaling.”

Newton said if a gross receipts tax passes in Illinois, he will move his business to Indiana.

“I could literally pick up and move eight miles east, plus save $10,000 a year in worker’s comp (premiums),” he said.

“That would also mean tax dollars lost to Danville.

“The longer the (GRT decision) drags on, the worse it’s going to be,” Newton added. “Companies that were looking to come here will now start looking somewhere else.”

Service area suffers

Matt Groppi, owner of the Days Inn in Danville, can’t talk calmly about the proposed gross receipts tax.

“Obviously, we oppose it. It’s a pyramid tax,” he said. “My hope is our legislators have the wisdom to see this for what it is.”

Groppi said it would be “devastating” to the hotel and restaurant business he has been growing since taking over ownership in 2004.

Although the hotel complex on Gilbert Street doesn’t quite do the $2 million in annual sales to be affected directly by a gross receipts tax, “it’s close enough to be concerned,” he said.

Still, Groppi immediately would face an increase in supply costs.

“We would be taxed on the shipping (of supplies) to the warehouse, and then taxed again from the warehouse to the Days Inn,” he said.

“It would drive up the price ridiculously.”

Groppi would be reluctant to pass the cost increase on to his customers.

“I’m not sure I could pass it on to the guest,” he said. “Danville is an economy where you don’t have a lot of room for increases.

“People are on fixed incomes.”

Groppi said the gross receipt tax proposal is “not a good solution for business.”

“We’re challenged now with the tax laws as they are currently,” he said. “With Danville being a border town to Indiana, it’s even harder.”

Impact on everyone

Illinois businesses aren’t the only ones that would be impacted by a gross receipts tax. Consumers who purchase goods and services in the state also would pay a higher price.

“There’s nothing good that could come out of it,” Newton said of the tax. “It’s going to affect everyone in Illinois.

“The governor can say it’s a big-business tax, but everyone is going to pay this,” he said.

“There’s going to be an increase on everything we buy.”

THE GRT PYRAMID

The “pyramiding effect” of the GRT refers to the compounding nature of the tax. Because the GRT is imposed on every transaction of the business cycle, a product is subjected to multiple levels of taxation.

Here’s an example using a 1 percent GRT.

--Step one: Basic industry sells $100 worth of raw materials to a manufacturer.

Tax amount: $1.

--Step two: Manufacturer adds value and sends $200 product to an integrator.

Tax amount: $2.

--Step three: Integrator adds value and sells $250 product to a wholesaler.

Tax amount: $2.50.

--Step four: Wholesaler adds value and sells $300 product to a retailer.

Tax amount: $3.

--Step five: Retailer adds value and sells product to consumer.

Tax amount: $4.

Source: Center for Tax and Budget Accountability