Gross vs net revenue: principal vs agent and excise taxes

A company reports revenue "gross" when it records the full amount the customer pays as revenue and the amount it pays its supplier as a cost. It reports revenue "net" when it records only the fee or commission it keeps. The same transaction can therefore appear as a large revenue figure with a thin gross margin, or a small revenue figure with a high one.

Gross vs net presentation changes the top line and every margin calculated from it. It does not change gross profit in dollars, operating income or net income for the same transaction, because the supplier cost is either subtracted below revenue or never included in it.

Under US GAAP, ASC 606-10-55-36 through 55-40 decides which presentation applies. A company is a principal — and reports revenue gross — if it controls the specified good or service before it is transferred to the customer. It is an agent — and reports net — if its promise is to arrange for another party to provide it.

The standard lists indicators that a company controls the good or service: it is primarily responsible for fulfilling the promise, it bears inventory risk before or after the transfer, and it has discretion in setting the price. These are indicators, not a checklist; the judgement is about control, and a company can be a principal for some products and an agent for others.

Marketplaces, travel booking sites, payment networks and advertising intermediaries are common places where this judgement matters, and a company's revenue recognition policy note in the 10-K explains which way it concluded.

Taxes create a second gross-vs-net question. ASC 606-10-32-2A lets a company elect to exclude from revenue all taxes that a government imposes on a specific revenue-producing transaction and that the company collects from customers — typically sales, use and value-added taxes. Many companies make this election, in which case the sales tax on a receipt is not part of their revenue.

Taxes outside that election — for example, excise taxes that a manufacturer itself owes on producing or importing goods — follow the normal transaction-price rules. Producers of tobacco, alcohol and fuel may therefore show revenue both including and excluding excise taxes, and the difference between the two can be large.

The US GAAP XBRL taxonomy has separate elements for revenue excluding and including assessed taxes, so a data source that pulls "revenue" from filings has to choose one. When comparing a company across data sources, check which basis each uses before comparing margins.

A principal and an agent in the same industry can have similar profits but very different revenue, so price-to-sales and revenue growth are not comparable between them without adjustment. Gross margin is affected the same way. Profit measures in dollars — gross profit, operating income, net income — are unaffected by the presentation choice itself.

A change in a company's conclusion, or a change in its business model (from reselling inventory to running a marketplace, for example), can move reported revenue sharply without any change in the underlying profit. When revenue jumps or falls but gross profit does not, the revenue recognition note is the first place to look.