It sometimes seems hard to get a group of politicians to agree to anything, so it’s notable that just a hundred miles northwest of Tuesday night’s heated presidential debate, 104 state representatives of both parties came together in a unanimous vote to reform South Carolina’s antiquated business license taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. .
South Carolina’s business license tax regime has been slowly evolving—some might say devolving—since 1895. While there’s nothing terribly unusual about a state or locality imposing some sort of annual tax or fee on business entities, South Carolina’s model is unique. And in this case, being unique is very bad news for the state’s businesses.
Every locality in which a company does business has the right to impose its business license tax. Since businesses frequently operate in many jurisdictions, they are often required to maintain licenses and remit taxes to many local governments, even if their contact with a given jurisdiction is limited—in some cases, even a single delivery, installation, or service call.
The compliance costs of dealing with so many jurisdictions can be absurdly high. Localities have different forms, different filing deadlines, and different classification systems for businesses. Each jurisdiction collects separately; businesses cannot file or remit in one place or carry over information from one form to another. Often only paper forms are available. Sometimes rate and classification schedules are obtainable in person or via fax.
Because the tax is on gross revenue, it tends to “pyramid,” with the tax imposed at multiple stages of the production process. It is, moreover, particularly burdensome for low-margin operations. Still worse, nothing in the code requires apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. , so multiple jurisdictions can, and sometimes do, tax the same revenue.
Russell Sobel, an economist at The Citadel, calculated that a business serving all towns within a short drive of Charleston would require at least 31 business licenses, each levying the tax using different business classes and rate structures.
In short, it’s a mess. Everyone knows it’s a mess. But agreeing there’s a problem doesn’t imply agreeing to a solution—which is why the tax has persisted for all these decades, only getting worse over time.
Until now, perhaps.
H.4431 represents a thoroughgoing modernization of South Carolina’s business license tax regime. Although the tax will still be based on gross revenue, the reform package would, among other changes:
- Address the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. issue by providing a deduction for revenue earned from engaging in business in another jurisdiction where business license tax is paid;
- Establish a one-stop web portal for registering for and paying all business license taxes across the state;
- Provide a standard business license tax classification schedule to be used by all jurisdictions (though localities could vote to add subclassifications in some instances);
- Require all localities to accept a standard, state-provided business license tax application; and
- Create a delivery license for companies that only deliver into a jurisdiction, capped at no more than $100 per year.
The bill is not intended to deprive local governments of business license tax revenue. Instead, these reforms are designed to radically simplify (and enhance) compliance, improve the fairness of the levy, and bring an 1895 tax into the 21st century.
Business license tax reform was one of the key proposals in our late 2018 guide to making South Carolina’s tax code more competitive. Today, meaningful reforms of that tax appear to be in reach.
The bill awaits action in the Senate.
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