State law eliminates business license fees
Business license fees will disappear in North Carolina following the recent passage of the Omnibus Tax Law Changes. Currently, towns and cities use any of a number of schemes for calculating how much a business must pay for the privilege of doing business in municipal limits. The majority of legislators agreed that this patchwork of regulations was too inconsistent, led to exorbitant taxes and needed to be addressed.
“Some municipalities were abusing that, and they were enforcing it in some businesses very selectively,” said Sen. Jim Davis, R-Franklin. “That business license fee needs to be cleaned up.”
The initial Senate version had gone about that cleaning up by putting a $100 cap on all business license fees, regardless of the size of the business. That would be a tax hike for some — businesses in Waynesville grossing less than $1 million pay only $25 for their fee — and a huge break for larger enterprises like Wal-Mart, which can pay in the tens of thousands of dollars.
The House version, however, solved the issue by completely taking away municipalities’ ability to charge business license fees. That’s the version that ended up getting passed and signed by Gov. Pat McCrory. Under the new law, municipalities will be able to continue collecting fees as they have been until July 1, 2015, but after that they won’t be able to charge business license fees at all.
A bite out of budgets
That reality is getting some negative reactions from town leaders, who will have to figure out how to address the $60 million-plus shortfall the tax repeal will cause statewide. Though business license fees make up a relatively small portion of local budgets, they’re still a piece of the pie.
“Eventually it’s going to cost everyone because, like they say, it’s going to have to be made up either by higher tax rates or higher rates for services that a city provides, or cutbacks,” said James Robertson, tax collector for the town of Waynesville.
In Waynesville, business licenses made up $138,000 of the town’s $15 million budget in 2013-14, about 1 percent of the total. For Franklin, they account for 0.44 percent of the $8 million budget, about $35,000. And in Sylva, business licenses make up nearly 2 percent of the budget, totaling $66,500 of the $3.5 million budget.
“In Sylva, we don’t have water and sewer or electricity,” said Sylva Town Manager Paige Roberson. “Our only means of revenue are property taxes and then fees.”
The law would take quite the bite out of Sylva’s budget when it goes into effect next year, and Roberson is not happy about it. The town charges $50 per year to businesses grossing less than $3 million per year, while businesses making more than that pay a fee calculated as a percentage of their gross receipts. For most businesses in town, $50 is the rate that applies.
“I think that a $50 fee is not going to deter anyone from doing business in city limits,” Roberson said. “If they want to do business, I think it’s fair for them to pay a fee because they have their services, they’re using town services, streets and police protection.”
The town also uses the business license application as a tool to pull contact information for business owners in case of emergency, such as a break-in, and to provide a base line for compliance with regulations such as zoning laws and fire inspections.
“We’re going to have to work out what’s going to trigger those compliance issues that are mainly for safety,” Roberson said. “The privilege license was what started the process.”
A mixed bag for merchants
Though the North Carolina Retail Merchants Association applauded the tax repeal as getting rid of an “arbitrary” and “hodge-podge” system, not all local retailers agree.
“As far as from the business standpoint they’re going to get that tax one way or the other,” said Boyd Sossamon, owner of Radio Shack in Sylva.
He doesn’t necessarily see the change as a win for business, because municipalities will likely raise taxes or service charges in other areas to make up the shortfall. So, while Sossamon welcomes the prospect of keeping a little more cash in his pocket, he’s wary about whether the net outcome will actually be positive.
“It’s like the state is regulating what towns and the local government can or can’t charge for or tax, and it’s like the state’s getting more control over it and some of the local communities are losing out on that,” Sossamon said. “I’m always glad to pay less taxes and less fees, but it was not an exorbitant amount anyway.”
That aspect of loss of local control also has Bob Scott, mayor of Franklin, cringing.
“I’m not sure I understand why this is a matter for the General Assembly to be taking up when it’s a matter that the officials of municipalities are elected to handle,” Scott said. “If the General Assembly is serious about local control, they’ve just taken a local control away from a municipality.”
“There were some good goals for reform, but that’s not what they’ve done,” said Rep. Joe Sam Queen, D-Waynesville. “They just eliminated it entirely, and that leaves local government hanging.”
While the previous system of localities deciding on a business tax that worked for them had been good for many, it hadn’t served everybody.
Case in point is Danny Wingate, who owns Haywood Building Supply in Waynesville. Waynesville charges a $25 business license fee to all businesses grossing less than $1 million annually and then moves to a rate of 50 cents per $1,000 after that. That system works for many businesses, but Wingate’s business sells often-expensive building equipment to individuals and contractors in the community. So, regardless of how well his profits are doing, his gross receipts always come in high.
“I’m glad they repealed the business license tax in its current form because everyone’s not paying it,” Wingate said. “There’s too many exemptions. It’s an unfair tax. Gross receipts have nothing to do with gross profit.”
Wingate’s story is part of the reason that Rep. Michele Presnell, R-Burnsville, supported the tax repeal.
“Their bill was unbelievable, what they got from the town,” Presnell said.
Business license fees for individual businesses are not public record, because disclosing them would reveal sales numbers, but Wingate said he had been experiencing what he considers higher-than-fair fees since the town went to its current system.
“I love this town,” Wingate said. “ I want it to be good. I just want it to be fair.”
Not a final solution
What, exactly, fairness looks like could remain to be seen. Though the Omnibus Tax Law Changes have been signed into law, the business fee aspect wouldn’t go into effect until a year from now, and even legislators who supported the bill admit that a complete repeal may not be the final solution.
“I don’t take my position lightly, and I’m not inclined to force my will on municipalities or counties, but I have an obligation to protect the folks as well,” Davis said. “This bill is not a final solution.”
“Of course we want the cities to have enough revenue to work and get all their things they need to do,” Presnell agreed. “I don’t think that was the intent [to harm cities]. I would look for it to be restructured.”
For the next year, though, municipalities will continue to do business as usual while keeping a wary eye on the horizon.
“I think it just happened so quickly, the move on signing it, and I am glad there is another year that it doesn’t really take place until July 2015,” said Buffy Phillips, executive director of the Downtown Waynesville Association. “It will be interesting to see what happens.”
How they voted
• Sen. Jim Davis, R-Franklin
• Rep. Michele Presnell, R-Burnsville
• Rep. Roger West, R-Marble
• Rep. Joe Sam Queen, D-Waynesville
• Senate: 38-7
• House: 84-29