Privilege licenses were created to know who was doing business in a town, but over time local governments have transformed this tax into a huge revenue source.
There is much being written about the General Assembly’s efforts to reform North Carolina’s outdated tax system. This may be the single most difficult issue this session to find a workable solution, because no matter how you slice the pie someone is going to want a larger slice.
One of the provisions within the Senate plan is to eliminate local privilege license taxes by the year 2018. As stated in the article, privilege license taxes are annual fees that local governments levy on businesses for operating within city limits. Historically, these privilege licenses were created to know who was doing business in a town, but over time local governments have transformed this tax into a huge revenue source.
These taxes are not equitable and are not regulated. Many businesses pay little to nothing while others pay exorbitant amounts.
Essentially, a local government can change these taxes year to year to fill budget shortfalls or to fund new projects. This makes it very difficult for local businesses to consistently forecast their own budgets which can stall economic growth and hiring. Additionally the tax is specific to the location. Thus, a retailer who has more than one store and sells the same items at both stores must pay a privilege license tax for each store. What’s more, the amount of a privilege license tax can be set in various ways – a flat fee, a graduated scale based on population, or a percentage based on gross sales receipts - and each municipality sets its own structure. Several cities including Charlotte, Durham, Greensboro, Raleigh and Wilmington levy privilege license taxes on all retailers and set the amount of tax due based on their gross sales receipts.
In talking with our retail member companies over the years we have found that in some cases a retailer’s local privilege license tax exceeds tens of thousands of dollars.
What does this mean for businesses?
For example, in recent years there has been a huge swing in the privilege license tax amount that a small grocery store in Lenoir has been billed. This grocer’s tax went from $50 to $6,000 overnight, yet he sold no more groceries than he had the previous year. This is money he could have used toward payroll or to replace equipment.
Other towns like North Wilkesboro intentionally tailored the tax so it only hit a select number of retail businesses, and then brazenly used that money to renovate its downtown.
Another issue with the privilege license tax is that it has no relation to profit like income taxes and there is no relationship between the amount of tax and the amount of services received for that tax. The retail stores who pay the higher amount get no additional fire, police or trash services than those that pay $10 or $0 in privilege license taxes. Imagine if the same were true for property taxes in neighborhoods – some folks are asked to pay thousands of dollars, yet the neighbor down the street is billed only $10 or even $0. Do you think the folks living in those neighborhoods would be happy?
Reigning in local privilege license taxes has received bi-partisan support with legislators in both the House and the Senate. Senator Rucho's Tax Plan capped these taxes at $500 while Senators Clodfelter, Hartsell, Meredith and Jenkins’ tax reform plan completely repealed local privilege license taxes in 2014.
The retail businesses that are impacted by these archaic taxes and who employ 1 in 4 North Carolinians.These same retail businesses also pay property taxes and collect and remit sales tax for use by the state and local governments.
Retail businesses are open to paying their fair share, but they do not want to be a one-stop shop for local government budget gaps. Just as local governments want to be treated fairly so too do the businesses located within their city limits because without them, local governments and economies would truly suffer.
Andy Ellen is president and general counsel of the N.C. Retail Merchants Association.