South Carolina considers bill to standardize complex business license tax process

Tax & Budget
February 20, 2020

Private: Lawson Mansell

Policy Content Manager

On Tuesday, the SC House Labor, Commerce & Industry Committee unanimously passed H.4431, a bill to standardize South Carolina’s business license tax process and provide relief to local businesses.

Over 230 of the total 271 municipalities levy a business license tax on local businesses. Because municipalities have different processes for collecting theses taxes (different forms, costs, renewal dates), it can be a burden on small businesses, especially the service-industry businesses that perform their services across several municipalities and counties.

This bill, sponsored by Rep. Jay Jordan (R-Florence), is supported by 16 different associations, including the South Carolina Chamber of Commerce, who sent this letter to the General Assembly earlier this year.

So, what would H.4431 actually do to help provide relief to small businesses?

Saving businesses money

H.4431 would change the amount municipalities can collect from businesses by basing it on a business’s net profit instead of total revenue. When businesses pay their taxes to the state, the number they pay is based on a percentage of their net profit. In contrast, the business license tax paid to municipalities is based on a percentage of their total revenue, a much higher number than a business’s net profit. This reform will put those tax dollars back in the hands of local businesses, allowing them to invest it back into their business and the community at-large through hiring and expanding operations.

John Cassidy, a small business owner in Conway, told WLTX that this change is “not about padding the owner’s pockets more, what we can do now is add another person on staff or another two people on staff. So, what it would do is increase the economy instead of going to taxes.”

Of course, with this reform, the money that’s going back to these businesses is also leaving the budgets of those municipalities that levy the business license tax. Some town administrators are worried that this will present a major challenge to their financial planning. Both the Town of Seabrook Island and Town of Mount Pleasant have publicly opposed the legislation, saying that they will lose millions in revenue due to H.4431.

Saving businesses time

As the bill currently stands, it would streamline the business license tax collection process by requiring all the counties and municipalities to use the same business license tax form for companies and it would create an online portal where those companies can submit their information. Additionally, the bill would set the same renewal date and schedule for every municipality. This would be completely different than the current way businesses are having to pay their license taxes.

Anja Smith, who owns a plumbing business in the Upstate, told The Post & Courier that her plumbers cover 15 to 20 different municipalities and that oftentimes those towns or cities have different renewal dates and different ways of calculating their charges. Dr. Russell Sobel, an economist at The Citadel, estimates that Charleston small businesses are spending as much as 120 hours a year to adhere to the various compliance requirements by the 30+ municipalities in the Charleston area.

H.4431 would address this cumbersome process and remove the costly burdens that is currently being placed on business owners.

Success in neighboring states

South Carolina isn’t the only Southern state that’s had to step in to address a frustrating municipal business license tax process. Alabama passed legislation in 2006 and North Carolina passed similar legislation in 2014. Dr. Russell Sobel documented these reforms in his paper Reforming South Carolina’s System of Business Licensing.

Consider this from Alabama’s 2006 legislation:

“to provide a statewide uniform system for the issuance and calculation of the cost of municipal business licenses; to promulgate a common business license application form for use by all municipalities…”

Sound familiar?

Additionally, The Tax Foundation wrote the following concerning North Carolina’s system prior to the implementation of their reforms:

“Yet, it must be acknowledged that these privilege taxes… vary significantly across localities, creating considerable confusion and administrative costs. Some cities exact a flat rate from every business, while others levy a tax based on businesses’ gross revenue, number of employees, or size of capital.”

This wouldn’t be the first time that North Carolina has beat South Carolina to the punch on the issue of tax reform. In 2013, prior to their business license tax reform, they overhauled their tax system—simplified the tax code, lowered rates, broadened the base. Since then, they’ve seen an economic boom and a remarkable increase in state revenue.

Palmetto Promise has been advocating for similar reforms in the Palmetto State since 2017—you can read about our economist’s proposal here.

Although this particular issue is just a prelude to the major tax reform we hope to see in South Carolina soon, we’re glad to see common sense win the day for the sake of small businesses in our state in the meantime!