State Lawmaker Believes Columbia Knows Best; City Council Member Understands Where the Rubber Hits the Road

22 Feb State Lawmaker Believes Columbia Knows Best; City Council Member Understands Where the Rubber Hits the Road

State Lawmaker Believes Columbia Knows Best; City Council Member Understands Where the Rubber Hits the Road

From: Shannon Erickson [mailto:repshannonerickson@gmail.com]
Sent: Thursday, February 16, 2017 8:05 AM
To: William Prokop <wprokop@cityofbeaufort.org>; Van Willis <vwillis@portroyal.org> Subject: H.3560 Response to your commentary, please share with your Council members.

All,
I write to address concerns raised regarding business licensing legislation pending before the state legislature but also to share that business license tax reform has been requested by nearly every industry and business sector across this state and as such the current proposal is a very business friendly bill. I recognize the proposal is not perfect; however, I am confident those concerns and problems will be addressed and resolved through the legislative process – where public input is gathered, discussed, vetted and debated – to produce a bill that creates a more business friendly environment in South Carolina, while protecting the budgets and authority of our local governments.

Currently, businesses pay their license tax on the total of revenues collected often with little to no deductions that can create double taxation for certain business costs. H. 3650 does away with the archaic practice of paying a business license tax on the gross total of all revenues collected. The current proposal provides for a tax based on a business’s “adjusted gross income” with the intent of only taxing what should properly considered revenue to the business as opposed to the current practice of taxing their entire gross income.

As it stands now, business license laws and ordinances vary significantly across the state, and create considerable confusion and administrative costs for businesses. For example, there are different rate classes, different rates charged, different filing dates, different forms, different definitions of revenue, and different applications across more than 250 municipalities. This does not send a “South Carolina is Business Friendly” message.

In terms of standardization, this legislation would provide a uniform filing date, a uniform business license application, a uniform definition of adjusted gross income, a uniform appeals process, and a standard class schedule consisting of seven classifications across the state so that a business will be in the same class regardless of where they do business.

While this bill would standardize some aspects of the business license fee laws, much of the current way of doing things is retained and left within the discretion of the cities. Cities will be able to set the rates applied to each class. They will be able to establish sub-classifications of the standard seven classes if they have particular concerns in their area or want to encourage businesses to locate in their area. They will be able to continue to use the licensing laws to regulate businesses.

The portion of the proposal which concerns local governments greatly is the central collection/remittance system that businesses have requested most stringently to lessen the red tape costs they incur from having to submit multiple business license tax applications across our state. I recognize that local governments may not trust the state handling local government funds. I share the concerns of our local governments to protect their ability to do their work and I do not wish to see the state divert local funds into state coffers to increase state spending. However, I am confident the current legislation and safeguards will ensure that any business licensing taxes collected will properly be returned to the local governments.

Further, I believe the current proposals on business license reform will actually increase revenues for local governments. Implementing uniformity across the state (making it easier to comply) will increase business license applications by encouraging applications from those businesses who currently fail to properly file for a license out of the confusion caused by the current landscape of inconsistent laws and ordinances. A rise in business licenses would naturally result in more revenue to the cities.

Additionally, House bill 3651 (a companion bill to H. 3650) is estimated to return more than $6 million dollars to our local governments by having the Department of Insurance and the Secretary of State collect certain taxes and distribute those to the cities instead of the current method, whereby the Municipal Association of South Carolina collects the taxes and retains two to four percent for the service of returning those dollars to local governments. Cutting out the middle man would save the cities from paying the two to four percent service charge. Also of concern is the Attorney General’s office recent advisory opinion questioning the constitutionality of requiring businesses to pay taxes to a private non- governmental entity (the Municipal Association of SC). We should not have collections of our SC citizens’ and businesses’ hard-earned tax payments by un-accountable, non-government groups.

In sum, this legislation seeks to take steps toward standardization across the state and create fairness in defining what counts as revenue, while at the same time leaving the authority of applying business license fee laws and setting tax rates within the discretion of the cities. Like most legislation, this is a proposal and a work in progress that requires input from stakeholders to ensure it achieves the desired result. I pledge to continue to work tirelessly to ensure any reform is fair to both our business community and our local governments.

Here if you need me, Shannon

Representative Shannon S. Erickson South Carolina House District 124

(Sent by personal device, please excuse any typos or misspellings.)

Response from Mayor Pro-Tem Michael McFee on behalf of Beaufort City Council

February 17, 2017

Dear Representative Erickson,

We appreciate your timely response to our comments. There are, however, some errors in the logic that the State Representatives sponsoring House Bill 3650/3651 and yourself are using. We are, and have been in support of business license standardization as it relates to:

  1. Standard business license application that would be accepted by all business license operations in the State. The City currently accepts the standard application developed by the Municipal Association of SC. Why would we need another one developed?
  2. Standard rate classification system using the North American Industry Classification System (NAICS) The City already uses the NAICS as reported by the businesses that should be the same one that they report to the State and IRS on their tax returns.
  3. Standard due date for all business licenses. The City’s due date is April 15, and we agree to the May 1 due date proposed.
  4. Standard level of rate classifications (8 classes)  The City uses 8 rate classifications and has just recently amended our ordinance to condense the number of sub classifications reported within the rate class 8.
  5. Changes to the level of rate class based on IRS profitability statistics every two year.  This is already conducted by MASC and utilized by the City. Why again would we recreate the wheel for the new Board, which is a new level of bureaucracy? Not to mention the lack of knowledge, systems and understanding that the Secretary of State has over this revenue source. Why would you give the responsibility to an agency that has no expertise when one exists that does have the systems and expertise?
  6. Online payment portal. The City implemented an online payment portal for its business license, hospitality and accommodation tax payments that is accessible by anyone who has internet access. The benefit of this system is it is fully integrated with our ERP system. Using an independent payment portal will cause duplication of effort and a level of service that takes the City backward rather than forward toward true customer service. Even the portal that MASC was working on was being structured so that businesses could link to any municipality that had its own portal. Therefore, accountability and responsibility for the collection process entirely rests with the City and its personnel.

We are not in support of any portion of the process to be overseen or conducted by anyone other than the City or it’s representative (agent). The State is not our agent or our representative. We would like to further point out the Municipal Association of SC has been designated as our agent as it relates to the collection of the insurance taxes, brokers taxes and telecommunication’s taxes. The services that they provide are more than just the collection and distribution to the City. They also provide the collection efforts for those companies that save us from that administrative burden.   We know from past experience that the State would not fill this role and the collections efforts for non-payors would rest with the city administration. Lastly, they are also considered a quasi-government with employee participation in the State Retirement system. If they were a non-government group, as you claim, they would be barred from participation in PEBA.

You indicate in your letter that the business license is reported based on gross revenues.  First, we would like to point out that the City’s average business license fee represents 0.17% of every dollar. Sales tax is 6%, State and Federal Income Tax is at levels far above 6%. Exclusions to gross revenues are an acceptable approach for those taxes. But they are all significantly higher in percentage than what most business license fees are. Whether you are paying 0.17% of gross revenue or 17% of adjusted gross revenue, the dollar amount would be the same to achieve revenue neutrality, wouldn’t it? The difference is that the bill instead is full of exemptions for special interest groups who appear to have a louder lobbying group than your constituents do.

Your letter also states that Business license laws and ordinances vary significantly across the state. We agree, and that is why we support and have adopted the model business license ordinance developed by the Municipal Association.

Businesses are going to have to complete separate business license applications to each area that they do business in. The reason for that is not ‘red tape’ but for you, the citizen, to be protected. Would you want a business in your area to be licensed to sell food but not have a license from the State Health department to verify that they meet health and safety requirements? Would you want a contractor to perform construction services on your home who does not have a contractor license in the state or what about a home business operating a bed and breakfast in an area zoned residential? Business license officials do more than just collect an application and charge a fee. They verify that that business can conduct that type of business in the city or area of the city without causing harm to its citizens. There is continual interchange between permits, codes and the business licensing processes to ensure that our city is protected and maintained in accordance with zoning and other required compliance aspects.

We are also not sure that you are aware of the extent that the City would need to adjust its business license rates to compensate for the estimated shortfall. Our conservative estimate of the shortfall is approximately $1.1M. Business License rates would need to increase 62% to 75% above what they currently are. New business discounts as well as the early payment discount and longevity discount to local business the City of Beaufort offers would need to be repealed. The burden to cover this shortfall would be mostly felt by the small business community who cannot take advantage of the exemptions. That would not be business friendly! I do not know what analysis you are using to make the claim that local government revenues will increase, but we do not agree with your unfounded assumption. Just like Act 388, this bill is fraught with error and would damage the local economy you are supposed to be representing and dramatically impact the services that the city provides its citizens.

You are correct. We are greatly concerned with the collections being centralized at the Secretary of State. The legislation over simplifies the process and places the promulgation of the procedures, rules, and oversight in the hands of another bureaucratic organization that only carries an 11% municipal voice. Every piece of legislation whereby the State collects monies on behalf of local government has only resulted in a negative financial impact to the local government. The promises made have not been adhered to (ex. Local Government Fund). Legislators change, politics change and the result is that they are all forgotten. What remains is the negative impact to the local governments ability to operate and provide its citizens with the best possible services. Even when legislation is written to protect the local government, our legislators just vote for a ‘proviso’.   So, again, you are right. Why would we trust the State to fully collect on our behalf, remit in a timely manner, provide detail data for reconciliation purposes, or be accountable for their errors? That has not been the proven track record and we are not agreeable to this approach when there is so much more at stake. Our business license revenue equates to 20% – 24% of our operating revenues. Losing $1m plus, coupled with past failed attempts of the State to collect on our behalf, remit timely and accurately and report does not fare well.

If taking steps to standardization is truly your interest, then

  • Work toward sponsoring a bill that HB 5109 represented, or better yet, the one that the MASC Task Force has been working tirelessly on with several legislators and the State Chamber.
  • Refrain from including exemptions for the special interest groups and big businesses and close the loop hole that allows the State from adding more in the future.
  • Drop your support for HB 3650/3651.
  • Or better yet – look at measures to address all the legislation that continues to hamper cities and “home rule” such as: remove restrictions from Act 388, fund the local government fund 100% annually, give local option to institute a local option sales tax, and pay or reimburse us for the maintenance and repairs we perform on state owned assets.

You can’t fix just one piece of a very broken system. Otherwise, it is just political blather and piecemeal eating into local autonomy.

Respectfully,

Michael McFee

Mayor Pro Tem, on behalf of the City of Beaufort City Council

 

AND THE GREATER BEAUFORT CHAMBER OF COMMERCE IS LIKE A DEER STARING INTO THE HEADLIGHTS OF AN ONCOMING TRAIN. 

On February 2, South Carolina House Bill 3650 was introduced as new legislation that your Chamber is monitoring regarding changes to business licenses. Every for-profit business operating in Beaufort County, including all four municipalities and the unincorporated part of the County, is required to have a valid business license and pay an annual fee based on a percentage of the organization’s annual gross income and calculated on a specific classification scale. The Beaufort Regional Chamber believes in simplifying the process for all businesses, standardizing the rate and classification code, but it also does not want the reforms to be detrimental to our municipalities. We will continue to keep you up to date.

If this bill passes in its current form, most of our businesses — which are small — will be hit either by cuts in services or significant raises in business license fees while, special interests are carving out exemptions for larger statewide businesses and,  if there are lessons from the past,  the big guys will get more and more and the small business will pay more and more.  Just not fair!