Snow: SC Business license system needs reform

South Carolina’s system of business licensing is in dire need of reform.

The current system is overly complex, making it costly and burdensome for businesses to comply with, and for localities to enforce. A single small business that is a local service provider in a metro area such as Charleston or Columbia must have as many as 70 different business licenses to serve the entire area. And local governments waste substantial resources (estimated at more than $20 million annually) in administering the system that could better be used for other more important local government services.

The licensing system has strayed from its original purpose: It does nothing to ensure the quality or legitimacy of a business, but rather exists simply as an administratively costly source of revenue for local governments. The high fees, record-keeping burden, compliance costs and need to maintain licenses in areas that may not even be served in a particular year are a substantial drain on the resources that small businesses have to operate and grow as well.

Because business license fee taxes are based on gross revenue and do not exempt intermediate purchases, they result in double, triple or even higher levels of taxation when one business purchases goods or services from another to be utilized in the production of a final good. If a home builder sells a house for $150,000, he must pay a business license fee for the entire sale price on the home. Each sub-contractor (roofer, plumber, framer, electrician, painter, etc.) also must pay a business license fee for gross revenues. Building-supply companies, manufacturers, delivery companies and Realtors also must pay business license fees on their gross revenues.

In essence, each time the good or service changes hands, it is subject to additional taxation. A $150,000 house has been taxed as if it were a project costing more than $400,000. This results in higher prices for consumers and reduced business revenue.

The system also harms consumers in a second way by reducing competition that would result in lower prices. Therefore, it results in a higher cost of living for South Carolina residents. In fact, a recent study on reforming South Carolina’s system of business licensing by Russell Sobel states that the typical household in South Carolina pays an extra $500 or more due to these fees.

The current system does not provide a clear and rational link between the fees charged and the public services the license actually provides that are not already covered through other forms of business taxation. The rate differentials across types of businesses are usually based on a census-defined business classification system that has no relation to the true costs or burdens. Because of this, the system is overly selective and subject to political manipulation.

Local governments have no incentive to improve the system on their own; it must be done through state-level legislation, for which there is both historical precedent and a constitutional responsibility. North Carolina, Georgia and Florida have taken steps to improve their systems substantially by either eliminating business licensing or requiring the fees to be paid only where the business is physically located and/or applied to no more than 100 percent of revenue. South Carolina now finds itself in a severe competitive disadvantage.

Moving to a system in which each business must obtain only one license, in the area in which it files its state income tax return, and having that one license respected by other jurisdictions would result in substantial cost savings for both businesses and local governments, and promote entrepreneurship and competition in the state. License fee taxes could also be capped to help return resources to small businesses to help them operate and grow.

This story was originally published May 25, 2015 at 12:42 AM.