A business license is the tool used by local governments to monitor all businesses in their community. It triggers at least two types of tax. At a minimum a revenue and personal property tax is charged through this registration process.
Typically, the revenue tax is based on the total sales for a calendar year. Some industries pay this tax monthly, still some pay it quarterly, but most pay this tax once a year. Each state mandates this process differently but the computation is relatively similar. A base rate or flat fee is charged up to a certain dollar level and then a percentage is charged for each dollar in excess of that level. Below are two separate examples:
Less than $100,000/year in sales: The local Commissioner of the Revenue uses a flat rate fee program of somewhere between $30 upwards to $100 depending on the type of business operation. Usually, the professionally licensed operations such as hair stylists, funeral homes, etc. are charged the higher flat rate.
More than $100,000/year in sales: Here the Commissioner uses a flat rate plus a percentage of sales. So your revenue tax could be a flat fee of $30 to $100 plus upwards of 1% of any revenue in excess of $100,000. As an example, if your flat rate is $45, and your percentage tax is .0078 of revenue in excess of $100,000 and you had sales of $479,278 in the calendar year; then your tax is computed as follows:
It is important to understand that each state has their own respective definition of revenue. In my state, revenue equals total sales less adjustments, and less returns from customers. Notice that it does not equal every sale tallied but allows for returns or discounts to the customer. In effect, the state is identifying revenue as the actual final amount of cash you deposit to the bank account from the sales of your products and/or services. This is important because you need to fully understand the definition.
Now for an interesting transaction standard, in the large ticket item industries such as auto, RV, ATV, marine boats etc., this revenue tax is included on the bill of sale. Go look at your bill of sale from your auto purchase from a dealership. You’ll see the tax passed onto you! If you buy a $40 item at the store, you don’t see an extra line item for that same tax. To me it is a slight of hand in the way business is conducted. One of my blogs in the retail section is entitled ‘Retail Sales: There are No Rules’ . You can understand why for these industries, if sales run into the millions, the revenue tax can get to be a really big expense for the company to absorb. So they customarily pass this tax onto the customer. In the higher transaction count industries such as grocery stores or shoe stores, you can’t really add this line item to each receipt. Furthermore, your competition doesn’t do this and it could drive the customer away if they discover you include this in the sale. So there are customs in addressing this tax. I would suggest to you that if you own a business with very few but very expensive transactions similar to dealerships, I would make this entry a standard on my bill of sale to the customer. If the customer asks, just explain it to them. Some examples of other industries this would apply to include: landscaping, heating and A/C installation, appliance sales, furniture stores etc.
Note: In some states, real estate improvements are excluded from this tax because the real estate is taxed separately. Ask your accountant to identify this for you.
I also explained that the registration process triggers the personal property tax from the local Commissioner of the Revenue. I’ll address this issue in another blog.
I want to explain a little further about the license. This is not the same as the state license to operate. Every state allows a business or partnership to receive a form of entity status such as a corporation, partnership, limited liability company etc. This is not a business license, it is an entity existence certificate. Your local government monitors and charges a fee for a business license for you to conduct business within the boundaries.
Sometimes your business, especially those that are service related, will cross boundaries into another community. Do you need a business license in that community? In my state, the answer is no, you are allowed to operate in other communities as long as you have a license where the business is based. You still have to account for all revenues as if that service in another community was performed within the boundaries of your licensed territory. Each state has their own set of rules and definitions. Your accountant should be able to explain to you the requirements associated with your business operation.
As you can see, this specialty tax has a set of rules onto itself. It can also get expensive and as a small business owner, if you understand the situation, you can deal with the costs and include this in your pricing model. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you.
Other articles related to specialty taxes include the following:
Fuel Tax Credit – many businesses have the right to claim a credit for the purchase of gasoline or diesel that is used in business but not related to road transportation. Examples include landscapers, carpet cleaners, marine operations, and electrical generation. This article explains how the fuel tax credit came to be and how to qualify and make your claim.
Form 1041 – Income Tax Return for Estates – when an individual passes away, his estate will generate income prior to the distribution of assets to the heirs. During this time period, the estate must file an income tax return and Form 1041 is used for this purpose.