Many business owners and managers are aware that municipal business licenses are required to operate brick-and-mortar stores, and sometimes for other types of physical presence (such as licenses for seller-owned delivery trucks). A major misconception is that businesses are generally not required to hold a business license in the municipalities where they are doing business as remote sellers.
To determine where a business license may be needed, it is generally good practice to review the local business license ordinances for the municipalities where physical presence has been met or is going to be met. Business licenses are generally required for the start of business in that jurisdiction; when plans for expansion or other changes in business operation are being made, review of business license requirements should be included in those discussions. The definition of physical presence varies for each jurisdiction, but typically includes having a brick-and-mortar business location, owning or leasing property, having local sales personnel soliciting sales, and making deliveries to customers in seller-owned trucks.
But what about the municipalities where there is no physical presence? There are many cities and counties in the United States that do impose a business license requirement on remote sellers. It would be an overwhelming task to keep up with every business license requirement in every municipality that any remote seller may potentially make sales into.
Fortunately, in many states, the variation between the license requirements for municipalities that are in the same state is relatively trivial. In West Virginia, for example, most cities with a local business license require remote sellers to hold a license, but most California cities only impose a license when physical presence has been met. Cities in Alabama and South Carolina often use gross receipts as the basis for calculating license fees, whereas Washington and West Virginia cities often have a fixed business license fee but also require license holders to file and pay business and occupation taxes, which are based on gross receipts.
As business license fees and related taxes are often based on receipts, operating without a license in cities with low sales volumes generally comes with low risk. Many Alabama cities have a $10,000 annual nexus threshold for licenses for remote sellers, and cities in many states typically only apply the license fees or B&O tax to receipts above a certain dollar amount (for example, Weirton, WV excludes the first $125,000 of retail sales from B&O tax). On the other hand, operating without a license in cities with high sales volumes can generate exponentially greater risk, as many of these municipalities have high penalty and interest rates for late payments and non-filing (for example, Town of Central, SC has a late penalty of 50% per month late). To mitigate risk, it is a good business practice to perform routine reviews of municipal license rules in municipalities with high sales volumes.
Recently, we have seen aggressive discovery activity from municipalities in Alabama, California, Kentucky, South Carolina, and West Virginia, with many jurisdictions outsourcing these activities to 3rd party firms, who receive a cut of those penalty and interest fees for collecting the business license fees and unpaid taxes. Whether a municipality has their own in-house discovery team or outsources to a 3rd party firm, a lot of remote sellers are now being pursued for these unpaid fees. Many businesses are being uncovered during reviews of other tax records (including sales and use, property, and payroll taxes). Sometimes these discovery teams also request service/shipping addresses, which can be used to discover businesses that may be operating without a license.
Our team at Clarus Partners has specialized expertise in handling municipal business license and B&O tax compliance, including experience in responding to requests from discovery teams and consulting on nexus rules. We also offer SmartLicense, our business license compliance software, to aid in managing the ongoing compliance for these municipal licenses and miscellaneous other business taxes. Whether an organization has 100 licenses or 2,000, we have the tools, knowledge, and experience to ensure our clients are compliant with these local license and tax obligations.
By Deirdra DiVittis