Local business taxes hurt businesses

Published April 14, 2014

By Andy Ellen, President NC Retail Merchants Association, April 13, 2014.

The News and Observer’s recent editorial “Capping Local Business Tax Could Hurt Businesses” failed to point out that there was near uniformity among both Republicans and Democrats on the Revenue Laws Study Committee that the Local Privilege License Tax needed to be reformed. These legislators recognize that the local privilege license tax was never intended to be a revenue source and it was certainly never intended for some cities like Raleigh to charge certain businesses up to $20,000. In other words, this is not and was not a partisan issue but one of simply fairness and a case of much needed reform.

In this case, some local governments are exploiting a “loophole” in local government tax law by charging businesses that do not have a specifically listed privilege license tax a gross receipts tax that does not even take into account whether or not a business makes a profit. Depending on how one looks at it, the local privilege license tax is either a local income tax (with no regard to profit) or a local sales tax that the business is not allowed to pass along except by imbedding it in the cost of the good or service. It is simply a hidden tax.

All local taxing authority is derived from the General Assembly. When this taxing authority is abused – as is the case with many cities and towns with local privilege license taxes – it is the responsibility of the General Assembly to step in and rectify the situation. Local governments were granted the authority to charge privilege license taxes to identify who was doing business in their jurisdiction. The current local privilege license tax structure is hurting small businesses.

Take for example the small grocery store owner in the town of Longview (Catawba County) who saw his local privilege license tax go from $50 to over $4,500; the produce wholesaler operating at the State Farmer’s Market in Raleigh who saw his privilege license tax increase from $50 to over $9,000; and the radio broadcaster in Greensboro who is now being taxed on a gross receipt basis for all advertising sold. Does it really cost Raleigh $9,000 to go to the State Farmer’s Market and locate this business that has been operating since the 1940s?

And how does one rectify that Apex does not charge a local privilege license tax and is thriving without this revenue while Cary charges a local privilege license tax? Or that the City of Charlotte charges more than 40,000 individual businesses a privilege license tax and that 9,017 of those businesses are physically located outside Charlotte’s municipal borders? If this local privilege license tax did not exist one doubts that cities and towns would have the courage today to go to the General Assembly and say “we would like to charge businesses up to $10,000 to do business in Charlotte.” Similarly it is inconceivable that the General Assembly in 1997 foresaw the City of Raleigh charging some businesses up to $20,000 to know where they were located.

While some cities are screaming that they will be forced to cut services or threatening property tax increases due to the loss of this ill-gotten revenue, there are truly legitimate questions about how this money is being used. As an example, 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. The City of Durham which has an uncapped local privilege license tax announced last week that they are spending over $3.97 million to build a hotel. As Raleigh’s planning director and chief development officer recently said “Raleigh is not a city that has a declining tax base, so the city can be more strategic about how it offers incentives.”

Now is the time for reform of this archaic and inequitable tax.