Why is there a business license tax?
Businesses locate in cities because of the concentration of commercial activity centered in a city. This commercial activity depends on city services, including police and fire protection, zoning, street lights, sidewalks and many others that can’t be billed on an individual usage basis.
Through a business license tax, businesses help pay for the city services that they depend on to operate successfully.
How important is the business license tax to city services?
In most cities, 25 to 50 percent of their general fund budgets come from the business license tax, and there is no alternative revenue stream to replace it.
City leaders have little flexibility in raising revenue because of Act 388’s millage and reassessment caps and restrictions on the use of other revenue sources such as hospitality and accommodations taxes. This is in addition to the shrinking allocation from the Local Government Fund.
What is the model business license ordinance?
The model business license ordinance, developed by the Municipal Association, outlines language cities can use to ensure their business license ordinances comply with state law and other best practices of business licensing.
The model ordinance uses the North American Industry Classification System
to place businesses into proper classifications according to their profitability using IRS data. The Association updates these classes when the IRS updates the data to ensure cities have the most current information in their ordinances.
How can standardizing business license practices and adopting the model ordinance among all cities make the renewal process easier for businesses?
Standardization is an important step in helping to maintain this important revenue source for cities and towns.
Businesses with locations in multiple jurisdictions have a sometimes frustrating task — tracking the varying due dates for license renewals and rate class schedules. Municipalities and counties can adopt the Municipal Association’s model business license ordinance
and other standard practices to reduce confusion for businesses. These standard practices illustrate to businesses around the state the goal of municipalities and counties to be more business friendly.
What can cities do to standardize their business license renewal practices right now?
Cities that haven’t adopted the model business license ordinance should transition to using it as soon as possible. This standardizes license periods and due dates, which further streamlines licensing for businesses.
Cities should encourage business owners or operators who do business in multiple cities and towns to use the standardized business license application that helps avoid the hassle of filling out a different application for every jurisdiction where the business operates.
Business License Standardization Checklist
Accept the standardized business license application
Adopt the most current model business license ordinance with the standard seven classes
Adopt calculating the tax based on the business’ prior calendar year
Adopt the standard license year due dates and penalty dates
May 1 – April 30 License Year
April 30 Due Date
May 1 Penalty Date