Business License Tax

What is a business license tax?

A business license tax is neither a property tax nor an income tax. Rather, it is a way of requiring an entity or individual doing business within a municipality to contribute its share in support of the city. Municipalities are given the ability to levy a business license tax on the gross income of businesses in state law.

Why is there a business license tax?

 

Businesses locate in cities because of the concentration of commercial activity centered in a city which acts as both a source for customers and a magnet for talent. To be successful, this commercial activity relies 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% 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, thereby making the business license tax a critical revenue source. 

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 and federal 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 easy access to the most current information for 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 by reducing the procedural burden on businesses.

Businesses with locations in multiple jurisdictions have a sometimes frustrating task — tracking the varying due dates for license renewals and 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 this state that municipalities and counties are 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 makes doing business across multiple cities easier.

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