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Jamie C. Yesnowitz
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On Sept. 30, 2020, South Carolina Gov. Henry McMaster signed legislation overhauling the state’s business license tax system.1
Effective Jan. 1, 2022, the legislation simplifies South Carolina’s business license tax compliance requirements by establishing a standard business license tax application, uniform classification schedule and centralized tax filing and payment portal for use by each taxing jurisdiction across the state. The law also creates a standardized appeal process and allows taxing jurisdictions to immediately begin contracting with third-party collection agents that are subject to anti-harassment provisions.
Background and major provisions
South Carolina law authorizes counties and municipalities to levy a business license tax on the gross income of individuals or entities for the privilege of doing business within their jurisdiction.2
Because local jurisdictions are given autonomy to impose their own business license taxes, businesses are often required to maintain licenses and remit annual taxes or fees to each local jurisdiction in which they do business. The business license tax reform law was enacted with the purpose of creating uniformity across the state’s many local taxing jurisdictions, which are currently responsible for administering their own business license applications, filing deadlines, tax forms and classification systems for taxpayers doing business in their jurisdiction.
Standardized application, rate classes and filing portal
Effective Jan. 1, 2022, the new law requires the South Carolina Revenue and Fiscal Affairs Office (Office) to establish a standard business license application, which will then be adopted by each local taxing jurisdiction.3
Additionally, the legislation requires taxing jurisdictions to adopt a standardized business license class schedule as recommended by the Municipal Association of South Carolina and adopted by the Office by the end of every other odd year, using the latest NAICS business classification codes.4
Under the new law, taxpayers will report and pay business license taxes to all applicable taxing jurisdictions through a centralized business license tax portal to be developed and hosted by the Office.5
The legislation authorizes the Office to contract with software providers and payment processors in developing the web portal.6
Calculation of gross income and appeal provisions
The law clarifies that taxable gross income is calculated using receipts collected from business done within a taxing jurisdiction.7
Businesses domiciled within a jurisdiction are permitted to deduct receipts earned in jurisdictions on which they already paid tax, in order to prevent the double taxation of the same income.8
For taxing jurisdictions in which the taxpayer is not domiciled, business done within that jurisdiction includes only gross receipts earned within that jurisdiction.9
In any event, if a business pays a business license tax to another county or municipality, the taxpayer reduces its taxable gross income by the amount that is taxed in the other jurisdiction.10
In establishing their 2022 business license tax rate schedules, local taxing jurisdictions are required to use the gross income reported by businesses during the 2020 tax year so that the aggregate taxing jurisdiction business license tax collected in 2022 does not exceed the tax collected in 2020.11
However, taxing jurisdictions are not subject to the tax collection cap if tax rates remain unchanged from 2020 through 2022.12
The legislation also creates a streamlined state-wide appeal process for business license tax audits and assessments. For taxpayers receiving an assessment notice for the underpayment or late payment of tax, the law provides for an expedited informal conference process between the taxing jurisdiction and the taxpayer.13
Following this process, a notice of final assessment may be issued by the taxing jurisdiction, upon which the taxpayer has 30 days to appeal the notice to the taxing jurisdiction council, appeals officer or appeals board, and must pay at least 80% of the tax based on the final assessment to obtain a hearing.14
The hearing must be held within 30 days after the receipt of the appeal form and tax payment unless the parties agree to continue the hearing date.15
The taxing jurisdiction council, appeals officer or appeals board must issue a written decision on the assessment, which may be appealed to the South Carolina Administrative Law Court within 30 days of the decision date.16
Third-party collection agents
Effective immediately, the legislation provides that taxing jurisdictions may contract with private third-party entities to assist in the identification and collection of delinquent business license taxes.17
However, collection agents are prohibited from assessing taxes or requiring businesses to remit confidential taxpayer data on behalf of the jurisdiction.18
Third parties are permitted to collect a contingency fee based on a percentage of taxes collected or depending on the result obtained in the collection process, but only after the taxing jurisdiction issues a proposed assessment that becomes final.19
Finally, third parties are prohibited from engaging in conduct that is considered to result in the harassment of the business.20
Specific examples of harassment include: (i) further contacting a business after the business informs the third party in writing to cease communication; (ii) stating that a business is required to provide any information to the third party; or (iii) contacting the business in a manner that the third party knows or should know creates a meaningful business interruption.21
Businesses are permitted to bring a private right of action against third parties that violate the harassment provisions, and may recover actual monetary losses or receive $500 in damages for each violation, whichever is greater.22
If a court finds that a defendant “willfully or knowingly violated” the harassment provisions, the court may use its discretion to increase the amount of the monetary award to a maximum of three times the actual monetary loss resulting from the violation.23
South Carolina’s business license tax reform law represents the culmination of a six-year effort among state legislators to simplify the business license tax application, filing and payment process among the state’s counties and municipalities that levy a business license tax. The legislation is a welcome development for businesses operating in multiple locations throughout South Carolina that face challenges in complying with burdensome local filing and payment requirements. In particular, the centralized web portal will allow businesses to file returns and pay business license taxes from one location instead of adhering to separate filing procedures.
While the law provides some added clarity and consistency to the definition of taxable gross income to taxing jurisdictions in which taxpayers are doing business, open questions remain regarding specific sourcing rules that will likely require further attention. For example, there is much nuance and often a lack of consistency in the sourcing treatment of a business’s throwback receipts that may not be subject to tax in any jurisdiction. Varied sourcing rules may also apply to gross receipts earned by different industries, including brokers, insurance companies and manufacturers. Further guidance is expected on these issues before the law becomes effective in 2022.
A more controversial aspect of the tax reform measure concerns the ability of taxing jurisdictions to contract with third-party collection agents and auditors on a contingent fee basis. While contingent fee auditors have an incentive to collect more tax in order to maximize fees, the legislation does provide important protections against taxpayers that are affected by behavior from collection agents that is considered to constitute harassment. Specifically, taxpayers may take legal recourse against third parties that improperly contact the business, unlawfully issue assessments or request confidential taxpayer data.
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