Capital Goods: March 2014

The tangled web
By Scott Mooneyham

When lawmakers passed a sweeping overhaul of the state’s tax structure last year, one of their key goals was to make North Carolina more “business friendly.” Interestingly enough, they didn’t touch the tax that might be causing the most complaints from Tar Heel businesses owners. About 300 of the state’s 540 municipalities impose privilege taxes on businesses, forcing them to pay 
a fee to conduct commerce within their boundaries. It’s the wide disparity in how they’re applied that has business owners griping.

Some towns and cities charge a flat fee. Some charge more depending on the type or size of the business. Others apply a gross-receipts tax — levied as a percentage of revenue — to certain types of operations. State law, which gives municipalities fairly wide latitude in how to apply the tax, contributes to the disparity. It exempts some businesses, including banks, law firms and medical practices, and caps the amount on others, such as car dealers and building contractors.

Even though only a handful of cities apply the privilege tax on a business’ gross receipts, that’s what seems to be generating the loudest groans. At a recent hearing before a legislative committee, one business owner compared it to having to pay an additional income tax. Another, Raleigh produce distributor Lynn Ford, related how his company had long paid a flat $100 fee until the city reclassified his business. Now 
it falls under a gross-receipts tax that approaches $8,000 a year. “The people of North Carolina would never stand for this type of a tax on the state level,” he told legislators, “and we shouldn’t have to deal with it on a local level either.”

Municipal officials aren’t crossing their arms and rolling their eyes at these complaints. The Republican-controlled General Assembly has hardly been kind to local government lately. Whether it’s Charlotte’s airport or Asheville’s water supply, legislators have waded into local disputes and thrown their weight against cities. They also have squeezed them when it comes to growth by limiting their annexation powers. Staring that recent history in the face, city and town officials acknowledge some changes are needed. At that same hearing, Paul Meyer, director of governmental affairs for the North Carolina League of Municipalities, conceded that the complaints must be addressed. But he also noted that the privilege tax has become an integral part of how municipalities manage to balance their budgets. “I know,” he said, “everybody’s got a different perspective of what ‘solve it’ or ‘fix it’ looks like.”

The disparity shows up not only in how the tax is levied but in how much it contributes to the coffers of individual towns and cities. According to the School of Government at UNC Chapel Hill, about half of the roughly 300 towns and cities that levy privilege taxes get less than $10,000 a year from them. Only 40 collect more than $100,000, with just 18 gleaning more than $500,000. Statewide, the total was little more than $60 million in the 2011-12 fiscal year, a scant sum compared with the billions localities reap from sales and property taxes. Those figures suggest any gouging of businesses occurs in only a few places. It also might mean that legislative action could be perceived as the proverbial swatting of a fly with a sledge hammer — unless, of course, you happen to be one of the business owners being gouged.

Legislators, though, don’t appear to be sitting on their hands as the General Assembly’s short session approaches. They listened last year and, at one point, the Senate’s tax-reform package included a provision that would have capped local privilege licenses at $500 a year per business. But, as negotiations continued and legislators began worrying that their cuts could be seen as shifting the burden from state to local government, the provision was dropped. Both parties have suggested taking up the matter again. Rep. Julia Howard, the Mocksville Republican who co-chairs the House Finance Committee, responded favorably when Sen. Dan Clodfelter, 
a Charlotte Democrat, recently voiced hope that there would be interest in drafting a bill when lawmakers reconvene in May.

As this General Assembly has already proven, when you start tearing into tax policy, who knows what the result will be? Does too much uniformity mean municipalities won’t be able to distinguish between a mom-and-pop shop in 1,500 square feet down on Main Street and a huge chain retailer that sits on a lot the size of a city block? And if legislators want fairness, what about those exemptions on the books now? What a tangled web to unweave, when it’s for taxes we receive.

Scott Mooneyham is editor of The Insider, www.insider.com. Email him at smooneyh@ncinsider.com.