State and Local Taxes: Business Licenses
Kim Tarnakow, CPA
April 13, 2020
A business license is a license fee assessed for the privilege of conducting business within a jurisdiction. Business licenses can be levied at the state, county or local level and not every jurisdiction has one. The administration of business licenses can be handled at the state level, self-administered by the jurisdiction or handled by a third-party administrator.
A business license may be required for each separate line of business. For example, if a business has retail sales and service sales, a separate business license may be required for each type of sale. In the state of Alabama, a business reports all sales to the primary location, unless the company has a “branch office,” as defined in the Alabama Code, and a separate business license is being obtained for the branch office. The definition for a branch office is specific, so the rules should be reviewed to make sure the business qualifies to exclude branch office sales from the main office sales reported for business license purposes.
The nexus standard for business licenses varies by state. In Alabama, the nexus standard for business licenses is a physical presence standard. If your business has a physical presence in a jurisdiction, this could create business license nexus. Many businesses do not realize that Alabama has specific rules for delivery licenses. If a business is only entering a jurisdiction for delivery purposes and the sales to that jurisdiction are under $10,000, a delivery business license is not required. If delivery sales exceed $10,000 but are less than $75,000, the company may qualify for a delivery license at a nominal charge. If a business has a business license requirement for one year but does not the next, the taxpayer may still have to file and pay the minimum business license, or, the jurisdiction may waive the minimum fee upon notification by the business that they are no longer in the jurisdiction.
The business license fee may depend on the type of business. For example, in Alabama, there may be a different business license fee structure for a corporate headquarters versus a retail store. The business license structure will be different in each state and as in the case of Alabama, may also vary by jurisdiction.
As a business, you should be aware that entering any jurisdiction potentially creates a business license requirement. Whenever entering a new jurisdiction or starting a new line of business, consult the appropriate business license rules. Many states and cities have helpful guidance regarding doing business in their jurisdiction.
Business license enforcement is on the rise. Business license audits often are conducted simultaneously with sales/use tax audits. Auditors are also reading the paper, looking at websites and noticing delivery vehicles within their jurisdiction. What you are doing to market your business to potential customers may be bringing unwanted attention from taxing authorities.
If you have questions regarding business license rules and your company, please contact Kim Tarnakow at firstname.lastname@example.org or at (205)733-8265.