Jared Walczak

Jared Walczak

Businesses come and go, but South Carolina’s almost comically antiquated business license tax endures. It’s a tax no one would design today, but one that still endures because local governments are unwilling to give up the revenue. Now, after nearly 150 years of this ever-more-byzantine tax, some legislators are eyeing significant reforms.

Many states have business license taxes, but typically these taxes are modest, are imposed at a flat rate regardless of industry, and are levied only where a company is headquartered or has facilities in that state. Not so in South Carolina. In Columbia, for instance, there’s a special rate for pumpkin stands, which is different from the rate schedule for ice cream, and entirely different from how companies selling popcorn roasting machines are taxed.

It’s not just this granularity that makes the tax ridiculous, though. It’s also the tax’s base: gross income.

It’s already peculiar that business license taxes in South Carolina are based on income, since that’s not how such license taxes usually work. It’s even more surprising that they’re based on gross income, not net, turning the South Carolina Business License Tax into a gross receipts tax. Like all gross receipts taxes, this one results in what is known as “tax pyramiding,” where the tax is imposed at each stage of the production process (resulting in double taxation), and where low-margin firms face much more onerous tax burdens than their higher-margin competitors.

And everyone gets into the act. Localities have very low thresholds for liability under their business license taxes, so even small businesses can owe license taxes to dozens of jurisdictions. According to Russell Sobel, an economist at The Citadel, a business serving all towns within a short drive of Charleston would require at least 31 business licenses, each one levying the tax using different business classifications and rate structures. Still worse: The law doesn’t provide for apportionment of income, theoretically meaning that each jurisdiction could tax the entirety of the company’s gross income.

In practice this doesn’t usually happen, but it’s mitigated by negotiations, rough estimates and informal agreements — hardly the stuff of equity, neutrality, simplicity or predictability, the principles of sound tax policy. Compliance costs are incredibly high, exacerbated in that many localities don’t even have an option to file these taxes online. For a small business, dealing with tax compliance in dozens of jurisdictions can cost more than actual liability.

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What can be done? First, lawmakers could consolidate administration within the secretary of state’s office, creating a one-stop shop for filing in all jurisdictions. Second, apportionment could be implemented, using the same standards the state does for the corporate income tax. Third, liability could be capped at a flat fee in jurisdictions where a company only delivers, with no other business activity.

And, finally, the tax could be imposed on a net income (profits) rather than gross revenue basis, more like a corporate income tax. This would also eliminate the need for complex, dueling rate schedules. Nominal rates would be higher (imposed on a narrower base), but liability would not be, and the system would be dramatically simpler and fairer. Alternatively, in a more robust change, South Carolina could copy its peers and just impose flat license fees.

A bill addressing some of these issues is still in the early stages, and its specifics may change. But more importantly, the tax itself should change. South Carolina entrepreneurs should not be held back by such an outmoded tax.

Jared Walczak is director of state tax policy with the Washington, D.C.-based Tax Foundation.