South Carolina House Bill 4431 was passed and Signed by South Carolina Governor Henry McMaster on September 30th 2020 and became act number 176 of the 2020 session. During its ratification process, we covered in a previous post what we saw in the bill as important parts for you to consider. To make this post comprehensive, we’ll include the information from that post that hasn’t changed and highlight the changes we see in the final revision first.
Of course this is our first look and non-legal opinions. The Municipal Association of South Carolina is working on their official guidance and making changes to their model ordinance and rate tables which should be released shortly.
As promised here are the new items we’ve discovered in the bill since our first review in the summer.
1. Effective Date
SECTION 3. Section 6‑1‑420 of this act takes effect upon approval by the Governor. The remaining sections of this act take effect January 1, 2022.https://www.scstatehouse.gov/sess123_2019-2020/bills/4431.docx
While I agree with Maria Von Trapp that starting at the beginning is usually a “very good place to start”, in this case one of the best changes for municipalities is that the change date has been extended to next year. The original revisions has this as 1/1/2021, which would have given us all three months(!) to make these changes. Note that section 6-1-420, the ways a municipality can use of a third-party collector, still take effect immediately.
2. Revenue Neutrality Stays with 2020
(I)(1) A taxing jurisdiction must establish its 2022 Business License Tax Rate Schedule using the gross income reported by businesses for a twelve‑month period in the 2020 business license year so that the aggregate taxing jurisdiction business license tax calculated for 2022 does not exceed the aggregate taxing jurisdiction business license tax collected in 2020 from the same businesses.
While the date of the changes to the business license process will not take effect until 2022, we’re still going to compare licensing revenues against 2020. If we’re talking about 2020 revenues, that means we’ll be using the revenues reported for that cycle by the businesses, their 2019 revenue, to perform any justifications for rate adjustments.
Now the total business license revenue collected in 2022 from the businesses included in the comparison class might in fact increase if their gross revenues increase. The limitation is that business license revenue cannot increase as a result of class or rate changes, but they can increase as a result of growth in gross revenues.
3. License Expiration Date
(B)(1) A business license must be issued to a taxpayer for a twelve‑month period beginning May first and ending April thirtieth.
(B)(1) has been updated to clarify that the start and end dates of business licenses. Many municipalities set the license to be valid for the calendar year but allow a grace period for payment and obtaining of the license until the due date. If your current license is based on the calendar year, your municipality may want to consider extending the expiration date of the 2021 licenses through April 30th as part of adopting a new ordinance. I’m no expert, but not having a valid license available for new businesses in from January until May 2021 may make it difficult for you to register new businesses and enforce any business license terms.
4. Gross Income Definitions
There’s a whole new ‘Section E’ on Gross Income. It’s largely an extraction and improved formatting of the revenue definitions that were buried in provision (B)(3) or earlier revisions. However, it did make us notice a key clause about Manufacturing that we cover below.
5. State Business License Portal
J)(1) A taxing jurisdiction shall provide access to taxpayers for the reporting, calculation, and payment of business license taxes through the business license tax portal hosted and managed by the Revenue and Fiscal Affairs Office, subject to the availability and capability of the portal…
…In addition to allowing a payment through the business license tax portal, a taxing jurisdiction shall allow a taxpayer to file and pay its business license tax in person at a location within the taxing jurisdiction, by telephone, by mail, or through an online payment system in existence on January 1, 2018, or prior, that is owned and operated by the taxing jurisdiction.
This was added out of the Senate committee before reconciliation. If we read it literally, it’s saying that, if you have a payment portal in place that the jurisdiction “owned and operates”, you are now required to keep it in operation in perpetuity. Uh, okay… Does that mean that, if you had one in place and you operated it but it’s hosted for you elsewhere you’re off the hook? If you had one managed locally in 2017 and stopped, now you’re required to bring it back? I’ve watched the video of the Senate Finance Committee. The stated purpose of the amendment in the committee’s discussion was to allow the press freedom to obtain information and nothing was mentioned of this change.
The apparent intent of the change was to provide that municipalities with their own online payment systems could continue to use those systems without being required to exclusively use the portal. However, all municipalities must also allow use of the portal even if they have their own online payment systems. The portal will be used by businesses filing in multiple jurisdictions under a single application, while a locally owned online payment system could be used by businesses filing in only a single jurisdiction. It’s probably less confusing for affected municipalities to allow use of either the portal or the local system.
Stuff From Previous Revisions
Our previous coverage of the bill looked at what we considered the most important changes, but now that it’s in it’s final form, there were a couple of items we noticed and wanted to talk about for completeness:
1. Manufacturing Revenues May Decrease
(d) ‘Gross income for manufacturers of goods or materials with a location in a taxing jurisdiction’ is the lesser of gross income collected from business done at the location, the amount of income allocated and apportioned to that location by the business for purposes of the business’s state income tax return, or the amount of expenses attributable to the location as a cost center of the business. Manufacturers include those taxpayers reporting a manufacturing principal business activity code on their federal income tax returns.https://www.scstatehouse.gov/sess123_2019-2020/bills/4431.docx (our emphasis)
We didn’t notice this in our original reading, but now that it’s in its own section in the final version, the wording above really caught our eye.
Traditionally, these methods of calculating gross revenues for manufacturers have been used as a sequential preference system. The assumption is that the first method (business done at the location) is the preferred method. This includes the gross revenues attributable to goods manufactured in the jurisdiction but sold or delivered elsewhere. Some businesses claim that they can’t report this, either because of their internal accounting processes or because the goods are component parts of a final product made elsewhere. In those cases, the income allocation or expense cost-center approaches can be substituted. It appears that the new bill will allow manufacturers to simply choose the lowest value, even if they could provide the information for another, more preferred valuation method.
2. Outsourced Collections are regulated
Apparently there were a lot of very aggressive contingency-based firms to whom smaller communities had wholly outsourced their license processing. As a result, a large portion of the original bill would largely have banned such organizations.
Most importantly, contingency-based contracts (ones based on a percent of revenue) are disallowed except for pursuing delinquent payments not made 30 days after the initial “Notice of Assessment” (late notice) is sent out.
It looks like you can still outsource some aspects of the process for a flat fee or hourly rate:
|Jurisdiction Must:||Provider May:|
A business may notify the provider in writing to cease communications, at which point the provider may no longer contact that customer.
Stuff We Already Knew
Of course, there was already changes legislated by the bill that we knew about in the summer. For completeness sake, we include them here and have updated the legislation text as necessary
1. New Expiration & Penalty Date
(B)(1) A business license must be issued to a taxpayer for a twelve‑month period beginning May first and ending April thirtieth. Each business license issued must expire April thirtieth or, if issued on a construction contract, at the completion of the construction project. The business license must be renewed before May first of the year in which it expires. If the tax is not paid before May first, then a taxing jurisdiction may impose penalties, except that an admitted insurance company may pay before June first without penalty.
For most municipalities, this sets a later date for licenses being due than currently. For smaller municipalities without adequate cash reserves this may impact cash flow. For most organizations though, this just pushes the mad rush of the due date back a couple weeks. On the plus side this should make it easier for most businesses to provide tax documentation as proof of revenue. Luckily those poor insurance companies get a break of an extra thirty days to submit.
2. New Business Calculations
(B)(2)The business license tax must be computed based on the gross income for the calendar year preceding the due date, the business’s twelve-month fiscal year preceding the due date, or on a twelve-month projected income based on the monthly average for a business in operation for less than one year. The tax for a new business must be computed on the estimated probable gross income stated in the license application for the balance of the license year.
Many municipalities have some sort of ‘estimate and reconcile’ pattern for new businesses, where the first three years are charged based on forward-looking estimates and then reconciled versus what was actually earned the following year. For example, if I say I think I’ll earn $25,000 in my first year, but actually make $50,000, then I add the $25,000 difference to my second year revenues.
The intent of the bill seems to aim to simplify this by stating it must be based on the gross income, and the new business license tax must be computed on the estimated probable gross income. Those wanting to follow that intent would structure their license calculations simply as:
- First year taxes are based on the estimate of income provided by the business, unless income has already been obtained in which case it’s based on the monthly average revenue earned so far.
- Second year revenue and onward is based solely on prior year earnings.
There is a gray area here a municipality may consider if they want to maintain rules closer to those already in place. First is the idea of what can be used as factors to calculate the tax. Subsequent years “must be computed based on the gross income”. It doesn’t state that it is *solely* computed on gross income. In fact, since first-year calculations are solely focus on “estimated probable gross income“, you could argue that the difference in wording is specifically to allow for the inclusion of addition calculations, such as those for catch-up, could be made.
However, an equally valid argument could be made that the use of the word “must” and exclusion of any additional verbiage about a reconciliation period means that this practice should be discontinued. Frankly the practice is also confusing and adds complexity to the renewal process for newer businesses, so simplifying it may lead to reduced errors and staff time.
Please note that I’m not a municipal attorney; follow their advice regarding the above.
3. Refunds are Not Obligatory
(D) A taxpayer is entitled to a refund if he submits a business license tax payment that is greater than the amount owed. The refund must be requested by the taxpayer before June first. The taxing jurisdiction shall issue the refund to the taxpayer within thirty days of the taxpayer’s request for the refund.
Unfortunately this is not a revenue windfall; you don’t get to keep an overpayment of a business if they don’t ask for it. What it does mean is that you may keep it as a credit on the businesses account and allow them to deduct it from next year’s return, so you at least may save a few stamps and hours processing the difference.
4. NAICS not SIC
(E)(1)…using the latest business classification codes of the latest North American Industry Classification System (NAICS).
If you’re still classifying businesses based on SIC codes, you’ll need to change over.
5. How You Classify Businesses Will Change
(E)(1)By December thirty first of every odd year, a taxing jurisdiction levying a business license tax shall adopt, by ordinance, the latest Standardized Business License Class Schedule as recommended by the Municipal Association of South Carolina and adopted by the Director of the Revenue and Fiscal Affairs Office
At least half of municipalities reading this have already adopted the Municipal Association’s standard ordinance. Assuming they also updated the schedules, they’ve made that transition. For the rest of you, the adoption these schedules means moving a lot of businesses from their current classes to new ones. One municipality we worked with saw 42% of their businesses change classifications.
This also means that the municipality now has an obligation to stay aware and make any adjustments whenever the ‘Standardized Business License Class Schedule’ is published by the Municipal Association.
6. Adjust Rates to Stay Revenue Neutral
(G)(1) A taxing jurisdiction must establish its 2021 Business License Tax Rate Schedule using the gross income reported by businesses for a twelve-month period in the 2020 business license year so that the aggregate taxing jurisdiction business license tax calculated for 2021 does not exceed the aggregate taxing jurisdiction business license tax collected in 2020 from the same businesses.
Classification changes also impacts collections. You need to study carefully whether the required changes, without any rate changes, will impact licensing revenue. The legislation does allow you to make adjustments to your rates for each class though, as long as you can show that those changes, based on last year’s revenue for the same businesses, will not raise any more revenue this year. Since this means that some businesses will inevitably be paying more, you need to make sure this is well documented in case you receive any challenges to the new rate structure, even going so far as to include it as part of any public discussion.
7. Business License As Economic Development
(E)(2) A taxing jurisdiction, upon a finding of a rational basis as explained in its ordinance and by a positive majority vote of council, may provide for additional reasonable subclassifications, described by an NAICS sector, subsector, or industry, based upon particularized considerations as needed for economic stimulus or the enhanced or disproportionate demands by specific business subclassifications on taxing jurisdiction services or infrastructure.
As discussed in a previous post, I believe one of the goals of a progressive licensing department is to help encourage growth in businesses that exploit the community’s unique attributes. For example, a municipality that wanted to encourage an automotive manufacturing cluster could specifically subclassify rates for those NAICS codes for a period of time. Think you could be the hip artist community outside of a larger metropolitan area? Tailor your rates for the NAICS codes accordingly.
8. Your Collections Process Will Change
(I)(1) If a taxpayer fails or refuses to pay the business license tax by May first, the taxing jurisdiction business license official shall serve notice of assessment of the business license tax due on the taxpayer by mail or personal service.
Section I lays out a specific collections process, one that involves a hearing with either council or possibly a new License Appeals Board. The process also comes with specific deadlines for the municipality to follow or presumably could lose the right to collect on appeal. Software and/or paper processes will need to be updated to manage and track the new appeals process
Section 6‑1‑410 lays out the specifics of the appeals process:
- A notice of assessment must be sent to the business after the original due date.
- The business may request an adjustment of the assessment within thirty days
- Within fifteen days of the adjustment request, the collecting agency must provide the opportunity to meet informally to review evidence from the business for the adjustment request.
- Within five days of the meeting, a ‘final assessment’ must be delivered
- The business then has thirty days to appeal and as part of the appeal must pay 80% of the tax due.
- Within thirty days the jurisdiction’s council or designated appeals board must grant a hearing date and notify the business.
- The hearing must be recording and evidence provided. The appeal is decided by majority vote.
- After the decision of the appeal is delivered to the business, they then have thirty days to appeal to the Administrative Law Court.