If you have applied for any local funding lately as a result of Covid-19 then you may have noticed one of the requirements was to provide proof of a valid local business license. Or you may have submitted your business formation documents to the secretary of state and received a notice from the city informing you that you are required to obtain a local business license. If either of these scenarios sound familiar then you have at least a general understanding of one of the most annoying tax requirements there is, so annoying in fact that the industry calls it a nuisance tax. Read on to learn more and how recent changes may effect you.
What is a business license?
A business license is typically issued by a municipality (town, city, village, borough, township) within a county to a business owner to operate a business within a jurisdiction. The term “Business License” is used interchangeably with the following terms – occupational license, occupational tax, business registration, business permits, privilege license, business privilege license, business license and occupational tax, business tax, city permits etc. The titling depends on the local government.
Business licenses are largely determined by the issuing municipality in respect to the fee amount, frequency of payment, document requirements, processing time, prior or concurrent approvals by other departments within the municipality, timeline for renewal, and penalty for late renewal/payment. These rules vary according to the location of business and nature of business.
The duration of most business licenses runs on a fiscal or calendar year basis or any other period stipulated by the issuing municipality. Upon expiration, a business license may be renewed annually, monthly, biannually, 90 or 60 days, odd years, even years, biennially, triennially or quadrennially. Penalties of varying degrees may apply for non-renewal of license within specific a time frame. So it is easy to see how difficult it can become to keep up with this requirement.
Business licenses are dynamic by nature as most states stipulates its exact requirements and processes to carry out business activities within the state.
In order to operate certain businesses, an owner may be required to comply with a combination of licenses and permits from federal, state or local government agencies. They may also be required to comply with additional permits from the health, police, fire, building, or zoning departments. These requirements vary based on industry, location, and rules in place. For example, the New York Department of State’s Division of Licensing Services (DLS), oversees the licensure, registration, and regulation of certain occupations throughout the state. Hence, it would be insufficient to obtain only one level of approval to be engaged in a business. Businesses of a more complex nature such as mining, drilling or nuclear energy may require the approval of a federal agency. An example may be found in the state of Arizona, where providing or selling a specific service/product may require obtaining the state transaction privilege tax (TPT) license from the Arizona Department of Revenue.
In some cases, business license processes are handled by the state department of revenue who is responsible for the collection and administration of state and local taxes within the state. There might an additional requirement to obtain a unique identification number (different from the Federal Employer Identification Number (EIN)) and such unique number is included in all business licenses renewal applications and other relevant documentation in respect to engaging in a business activity within a state.
More states are progressively adopting online uniformed licensing systems and business portals. These state operated portals serve as a one stop shop for all business and tax fillings, business license registration/renewals, obtaining approvals from municipality departments, information, and resource tool.
Other developments worthy of note include the periodic revision of municipality ordinance in respect to its business licensing regime ensuring it captures all business types and activities. Another is streamlining license applications to specific service/activity by issuing special permits or licenses rather than an application for a range of business activities.
As noted earlier, the nature of business licensing regimes is largely dynamic. This dynamism is enabled by the adoption of various technological platforms to ensure information is available to business owners. It is also important to reach out to the designated municipality government official for questions and clarification when required.
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Ifey Anekwe is a foreign trained attorney with extensive experience in providing tax and legal services to clients of local and international markets. She is also an alumnus of New York University, School of Law where she obtained a graduate degree in International Tax.