What Happened to Business Tax Reform?
● Major reforms no longer under discussion
● One bill would put nonprofits in charge of business taxes
● Legislation would allow lobbyist principals to set taxes
● Municipal, county associations would handle confidential tax docs
For a year or more, some reform-minded Columbia politicos have been discussing the need for business tax reform. Among the top reform measures: imposing the business tax on income, not revenue; capping the business tax; and ensuring that businesses aren’t required to pay more than one license tax simply because they do business in more than one municipality or county.
Have way through the 2016 session, however, all these ideas have disappeared, and we’re left with two competing bills. The first, H.4967, offers minor reform by centralizing much of the administration of the taxes in the Department of Revenue (DOR). The other, H.5109, would allow quasi-governmental non-profit groups – both of which employ lobbyists – to set tax rates and view and share businesses private tax information.
A little background. Under current law, municipal governments are permitted to require licenses for businesses and impose business license taxes on businesses that are either located in or that conduct business within the municipality. County governments may also do so within unincorporated parts of the county. Both counties and municipalities are allowed to set rates on their respective business license taxes provided that the tax is levied on the gross income (i.e. revenue) of the business. Businesses required to obtain multiple business licenses in more than one county, furthermore, are not to be taxed on the same income twice.
A modest reform
H.4967 would disallow the imposition of multiple business license taxes on the same business. Instead, a person would only be subject to a business license tax in the county or municipality where his or her South Carolina income tax return is addressed. The legislation also requires local governments to hold a public hearing with a notice of at least seven business days before adopting a business license tax law.
Administration of the taxes would be moved to DOR. All business license taxes would be paid to DOR, which would then remit the revenues to the appropriate local government. That’s a reasonable reform. Curiously, though, DOR would have the option of retaining 1 percent of the tax revenues to offset administrative costs. But it’s DOR’s job to administer taxation, so it’s unclear why the agency should get a special fee for doing so. (The loss of this revenue to DOR will no doubt be used by localities to justify a tax increase.)
DOR would also set standardized business license tax forms, compliance dates, formulas, and penalties for all localities, and it would be the sole authorized possessor of tax return information for purposes of calculating license tax fees.
H.4967 would also mandate that payers have the option of completing the business license tax forms electronically and paying online.
Finally, H.4967 would make it clear that businesses are not liable for the license taxes of other businesses with which they contract, and that a business cannot have a permit withheld because of the tax liability of another business. Non-profit organizations and revenue from out of state would also be exempted from business license taxes.
Making a punitive tax far worse
H.5109, by contrast, would give publicly funded but nongovernmental nonprofit organizations the power to administer business license taxes
The power to set the business license class schedule (which informs tax rates) for municipalities and counties would be given to the Municipal Association of South Carolina and the South Carolina Association of Counties, respectively.
Both groups are governed by unelected boards. Neither is accountable to the public. The purpose of these entities is to seek the interests of, not businesses, but municipal and county governments. Both employ lobbyists.
Under this legislation, the associations would set the business license tax class schedule for their respective government bodies using North American Industrial Classification System (NAICS) codes. Business license taxes (as informed by the schedule) would be computed based on a businesses’ revenue for the calendar year preceding the due date, or the business’ twelve-month fiscal year preceding the due date. In the case of a new business or a business in operation less than a year, the tax would be computed using projected revenues or the estimated revenues stated in the license application. The associations would revise the class schedule every even numbered year, and local governments would have the option of imposing higher levels of taxation via sub classifications based on considerations of stimulus or the level of government services used by certain businesses.
In addition to setting the schedule, municipal and county associations would be tasked with much of the administration of business license taxes. Municipalities and counties would be required to accept a standard business license application developed – not surprisingly – by the municipal and county associations. Local governments would also be required to provide businesses with access to a municipal or county association’s business license tax portal for “reporting, calculation, and payment of business license taxes.”
The bill would prohibit county and municipality business license tax revenue in 2018 from exceeding the revenue collected in 2017 from the same businesses. Essentially, it would prohibit tax hikes for one year. But since the bill is almost certain to lead to tax increases in succeeding years, the provision seems designed to keep payers from associating the new law with tax increases.
Finally, H.5109 gives tax information currently only available to DOR or the IRS to a pair of nonprofit organizations. DOR would also be newly obligated to share information on net taxable sales or revenue with local governments or their agents – their “agents” being the municipal and county associations – for any reason.
The first of these bills, then, centralizes the collection of taxes in the proper authority, the DOR, and prevents double taxation. The second gives power over public taxation to lobbyist groups, paves the way for tax increases, and places confidential tax information in the hands of non-governmental organizations with no accountability to the public.
The business license tax effectively punishes people, not for actually creating wealth, but merely for attempting to do so. Eliminating it altogether would be the ideal reform.