Status Update – 7/22/2020: The legislation has passed the House and is in the Finance Committee’s hands in the Senate. At this point, the legislature is in recess and is expected to return for a final session in mid-September. According to their most recent podcast, the Municipal Association still expects the legislature to pass the bill in this final session. If they do not, the bill would then have to wait for the next legislative session in 2021.
South Carolina House Bill 4431 standardizes many of the ways business licensing works in South Carolina. The primary goal of the legislation is to standardize how the tax is calculated and when it’s due, making it easier for businesses with locations in multiple municipalities to manage their compliance. It will mean big changes for your business license department, but also represents opportunities for municipalities in the State. How might these changes affect your municipality? Let’s take a look:
1. New Expiration & Penalty Date
(B)(1) 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, a taxing jurisdiction may impose penalties, except 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 where the verbiage ‘based on’ does not exist, you could argue that the difference in wording is specifically so addition calculations, such as those for catch-up could be made.
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
The 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 communities 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