The Revenue Laws Study Committee, a bipartisan group comprised of members of both the House and Senate, met early this morning to discuss what are known as “privilege license taxes.”
A privilege license tax is an additional fee that’s imposed on business owners by city governments for the “privilege” of either locating a business within a city’s borders or for the “privilege” of having customers who happen to live in the city imposing the tax.
Under current state law, a city has the authority to levy a privilege tax on all trades, occupations, professions, business activities and franchises carried on within a city — on top of the existing property taxes, state and local sales taxes, income taxes, franchise taxes and other taxes they must also pay. (Although state law gives counties some authority in this regard, it is both extremely limited and financially insignificant, therefore we will and not address it here.)
For example, the City of Charlotte charges more than 40,000 individual businesses a privilege license tax. 25% of those (9,017 individual businesses) are physically located outside Charlotte’s municipal borders (some as far away as San Francisco) yet are still taxed for the “privilege” of having customers who live in Charlotte. Sound crazy?
“In general,” according to Professor Christopher McLaughlin of the UNC School of Government, “any individual or entity that is ‘doing business’ in a particular municipality may be subject to privilege license taxes levied by that municipality.” (See North Carolina General Statutes Section 160A-211). For a thorough discussion of the legal issues surrounding privilege license taxes, read professor McLaughlin’s entire article here.
300 of North Carolina’s 540 cities currently charge these so-called privilege license taxes on businesses in one form or another. And despite the term “license” in its name (or the fact that these “licenses” must be prominently displayed by businesses in order to avoid facing financial penalties or even closure), the privilege license doesn’t hold any regulatory significance in terms of conferring a legal “stamp of approval” by the city. For all practical purposes, it’s nothing more than proof to city inspectors that the business is all paid up. “It’s a protection racket,” privately quipped one legislator after today’s meeting. “If the mob was doing the same thing, it would be illegal.”
An obvious question arises about the propriety of even calling this a “privilege” tax in the first place. Speaking at last month’s meeting, Representative Moffitt of Buncombe County wondered aloud why we refer to it as a “privilege” tax at all. “Whose privilege is it? Is it the privilege of the business owner to operate in a municipality? Or is it the municipality’s privilege to have that business operate within their community, employ their citizens, contribute to the overall economic well-being of that community? My question is: whose privilege is it?”
The state has given North Carolina cities almost unlimited authority to levy these taxes on business owners. Unless a particular business activity is specifically exempted by the state from the extra fee (or the fee for the particular business activity is capped by state law) a local City Council can decide to levy these taxes on business owners in any “reasonable amount” or manner that it deems appropriate. Of course, “reasonable” is a matter of perspective.
For years, North Carolina’s cities have been allowed to decide the manner in which they calculate these taxes — leading to vast inconsistencies across the state. Further, the tax can vary from business to business within the city itself. For instance, for one type of business, a city might calculate a privilege tax based on a percentage of sales (gross revenue) — for another, by the number of people that the business employees, or in some case even the size of its building. Or all three. Or none of the above: some cities charge every business within its jurisdiction the same privilege license tax rate in the form of a single “flat” tax.
Speaking specifically about the “gross revenue” method of calculating the privilege license tax, state Senator Bill Rabon of Brunswick County observed at the committee’s last meeting that “it’s not a city’s business to know that much about a business operating there,” and refers to the privilege license tax as merely “a license to gouge — and that’s what I think a lot of these municipalities are doing; they’re just goring a fattened ox.”
This wide discretion on how the law is applied has led to wildly different business tax scenarios from city to city. For example, under the current scheme, a typical SuperTarget store that earns $50 million in gross receipts could be treated quite differently depending on where they are located. Were that store located in Dunn, its privilege license tax liability would be $30. Were that store located in Durham, it’s privilege license tax liability would be more than $25,000.
“We want a tax code that is simple, that is fair to everyone, with no hidden parts to it,” continued Senator Rabon. “And right now the privilege tax section … is sort of a free-for-all.”
Every business type and virtually every business activity imaginable can be subject to the tax, and some businesses — including grocery stores, home improvement stores, and software developers — are not subject to any limits on the amount they are required to pay in city privilege license taxes.
There are some exceptions, of course. Over the years, a few powerful groups have successfully managed to get their professions exempted from these taxes by state government, including doctors and lawyers. (For a complete list of exemptions and caps on privilege license taxes (referred to as “Schedule B” by tax wonks) click here and for a comprehensive analysis of Schedule B and other privilege license tax information please read “City and County Privilege License Taxes” by William Campbell of the UNC School of Government.)
To compound the problem, North Carolina’s cities have largely been given free reign to dictate their own rules regarding what favored business activities are exempted, the amount each type of business activity is taxed, what caps (if any) might apply, and any other special exceptions city governments might want to carve out. A city can also charge multiple privilege tax rates all at the same time, and they often do.
At a large store it can get really confusing, as a city might charge a particular location dozens of different additional rates depending on the variety of product or service being sold. Have a DVD section? There’s a $25 tax for that privilege. Sell fountain drinks and hot popcorn to your customers? That’ll be another $42.50. Ice cream cones? That’s in a different category, so that’s another $2.50. That bicycle aisles in the back? $25 please. The beauty salon in the front? $2.50 per stylist for the privilege. An automotive department that sells motor oil? That’ll be another $12.50. Are you part of chain? $50 surcharge. Didn’t pay the right rate? There’s a tax for that!
Confused? You’re not alone. To read more about the wacky complexities of the privilege license tax and how it’s been applied in North Carolina, please read this other informative article by Professor McLaughlin.
Depending on an individual city government’s creativity or ideological agenda, the list of privilege license taxes on a business can seem endless — it all brings to mind President Ronald Reagan’s famous quote regarding government’s view of the economy: “If it moves, tax it.”
Some cities have come to rely on the privilege license tax as a significant source of income, although some legislators argue that this was not the original purpose behind the idea. “In the big vision what … the state of North Carolina needs to do is [just] identify every business that actually is actively participating in North Carolina,” said Senator Bob Rucho during today’s discussion. “And that is the point of this whole effort. It was never designed to be a revenue stream, it was designed to identify.”
That said, Charlotte, Raleigh, Greensboro, Durham, High, Point, Hickory and Asheville have all come to rely on this largely “hidden” tax on businesses as a significant source of their revenue. It’s considered hidden by many because — unlike the sales tax, which is clearly identified on a sales receipt — a city’s privilege license taxes are built into the cost of each product or service. The cost of paying it to the city is passed directly on to consumers — in the form of higher prices. “It is one of the least transparent taxes,” commented Professor McLaughlin at a Revenue Laws Committee meeting last month. By increasing prices, businesses in effect become pass-through tax collectors for the state. And it’s a tax that hits lower-income folks the hardest.
“Here’s how it works,” said Representative Andy Wells of Catawba County. “A city makes a retailer (like Walmart) pay a tax of, say, $25,000 for the ‘privilege’ of doing business in the city. The retailer then plugs the new cost into its computer and adds a small amount to each purchase at the store so it can pay the tax. So when local citizens pay their bill at the checkout line they see the sales tax added to the bottom of the receipt but the Privilege Tax amount is hidden inside the cost of each purchase. The consumer has no idea he or she just paid a tax to the city.”
The path forward
Every member of the committee who spoke this morning agreed that reform of the privilege license tax was necessary, although there was some disagreement on the right approach to take. A few other legislators, representing larger cities, were less than enthusiastic with what they see as a loss of additional revenue for city government coffers.
At today’s meeting (which went an hour over schedule) the committee voted to continue the debate by moving forward proposed legislation that establishes a standardized statewide “Fair & Flat Local Business Tax” to replace the patchwork of tax schemes which currently exist all over the state. At the committee’s next meeting, members will have the opportunity to more thoroughly debate this and other possible options.
Under the current draft legislation, cities would have the option of levying a business tax of up to $100 on each business operating within the city and the tax would apply to each business location. Accordingly, a business would be subject to the tax for each of its locations within a city, and a single location may house more than one business entity. And as we’ve seen, under current law, a business need not have a physical location within a city in order to be taxed; the business or trade need only be “doing business” within the city. The proposal also eliminates the multitude of restrictions and caps on various types of trades, businesses, and professions that exist either by virtue of the repealed Schedule B or any other existing State privilege license tax statutes.1
Some legislators, however, think that the “Fair & Flat Local Business Tax” doesn’t go far enough. This morning, Representative Moffitt called for the complete elimination of the business privilege license tax.
He’s not alone; there would seem to be bipartisan support building for the idea. Dan Clodfelter (the new mayor of Charlotte and former Democrat State Senator) also wants to repeal the privilege license tax altogether. He recalled recently that he has “filed legislation twice to repeal this tax” and expressed his frustration with the legislature’s slow pace of reform in this area: “We have invited the North Carolina League of Municipalities many times to come forward with reform proposals; we’ve never gotten a reform proposal.”
“I don’t think there’s any real benefit in playing around the edges of this and trying to deal with it in a piecemeal fashion,” Clodfelter continued. “I think the tax is archaic, it’s out of date, it needs to go away. It cannot be made rational and sensible. My only question to my colleagues is, when are we going to have the political will to take action and collapse this tax?”
The next meeting of the the Revenue Laws Study Committee is on Tuesday, May 13.
1. NCGA Research Division: “Summary: Fair & Flat Local Business Tax“