Tax & Business Licenses: A Case for City Business Licensing Prepared for GFOA – February 2016 Business and Financial Decisions

Definitions:  Tax License – “Municipal Privilege Tax License” – a City tax license issued in accordance with the Model City Tax Code and A.R.S , used to collect Transaction Privilege Tax (TPT). Some cities used the Tax License as a de facto business license – no longer allowed  Business License – License issued by the city/town in accordance with a separate City Code section, outside of the Model City Tax Code (MCTC). Some cities already issue a Business License to businesses that are not subject to Transaction Privilege Tax

Background A Tax License is required to collect the local TPT from businesses conducting taxable activities in the city. Non-program (self-collecting) cities still issue their own TPT license. The Arizona Department of Revenue (ADOR or DOR) includes Program cities through its TPT licensing program. Some cities require a Business License from businesses not engaged in taxable activities; some require a Business License from just about everyone. ADOR does not have a business license program.

Recap of the Law MCTC Article III eliminated the option to hold up a Tax License for other approvals A.R.S requires all Tax licensing be administered by ADOR for all cities and towns, beginning 1/1/2015 All new applications for a Tax License will be handled by DOR All ongoing Municipal Privilege Tax License updates administered by ADOR All annual Tax License renewals will be processed by ADOR

Business License Restrictions NO BUSINESS LICENSE ALLOWED FOR REAL ESTATE BROKERS, AGENTS, SALESMEN, OR PROPERTY MANAGERS WITH AN OFFICE IN ANOTHER CITY A.R.S Additional business license; real estate broker or salesperson; prohibition A city or town may not require a person to obtain an additional business license to do business within that city or town if the person is a real estate broker or salesperson licensed pursuant to title 32, chapter 20, article 2 and licensed to do business in the city or town in which the person's primary place of business is located.

Business License Restrictions NO BUSINESS LICENSE ALLOWED FOR RESIDENTIAL RENTAL PROPERTY A.R.S Adoption of citywide residential rental property licensing, registration or inspection program; requirements B. A city or town shall not adopt a residential rental licensing requirement for residential rental properties or property owners. This subsection does not prohibit a city or town that imposes a sales tax on rent from requiring a transaction privilege tax license for residential rental property owners. C. A city or town shall not adopt a residential rental registration requirement. A city or town shall obtain rental registration information only from the county assessor's office for the county in which the residential rental property is located.

Business License Restrictions NO BUSINESS LICENSE ALLOWED FOR WHOLESALE LIQUOR DISTRIBUTOR, UNLESS LOCATED IN YOUR CITY A.R.S Authority of cities and towns to tax transactions involving spirituous liquors; prohibitions A. In addition to the taxes provided for in this chapter, incorporated cities and towns shall have the power to levy a tax on the privilege of engaging or continuing in the business of selling spirituous liquor at retail within their corporate limits and to impose a permit tax or fee, but this section shall not apply to wholesalers licensed under section

Business License Restrictions WHAT ABOUT INSURANCE AGENTS? NO BUSINESS LICENSE ALLOWED FOR INSURANCE AGENTS, BUT YOU CAN REQUIRE A TAX LICENSE Effect of fees payment The fees paid by a captive insurer pursuant to section , subsection H are payment in full and in lieu of all other demands for all state, county, district, municipal and school taxes, licenses and excises of whatever kind or character, except for: … 3. The transaction privilege tax and use tax that is imposed by any county, city or town.

Business License - Purpose Provides the ability to regulate the approval process and have independent knowledge of all business activity within the city Provides significant demographic data used by various city functions, such as economic development, planning, zoning, police & fire A full Business License program assists city efforts to review tax payments and reports received from ADOR

What If We Don’t? Changes to MCTC and State statute preclude waiting for other approvals for a Tax License While all approvals still exist, there is no unifying process that ensures all approvals are acquired by all businesses Generally, ADOR only licenses businesses that generate a tax liability: a limited view of businesses in your city Identifying all businesses in the city is not possible if you rely on ADOR data alone

Sample Council Presentation - Peoria AGENDA:  Recap the new legislation  Current licensing methodology  Revenue Analysis  CY 2013 Licensing Revenue (Tax & Business)  Alternative Revenue Scenarios Reaching a Decision Critical Due Dates Ordinance to Council Wrap up and Questions

Current Peoria Licensing (1)  City Tax License required for all engaged in taxable activity in the City  City Business License required for all others doing business in the City – Mutually exclusive  Approval process for both  Application fee for business license $20

Current Peoria Licensing (2)  Annual fee for a Tax License: $50; no penalty for late or non-payment  Annual fee for a Business License: $55; no penalty for late or non- payment  Annual Renewal Process – Updates the demographics used by City departments  Issue an annual license certificate and collect renewal fee (same as initial fee)

Basis for Business License for All Businesses Background  No State restrictions* on City Business License (City retains freedom to act for anything outside of tax)  Current Peoria Code does not limit the Business License to only non- taxable businesses (11-151) *exceptions for Real Estate Agents, Residential Rentals, Wholesale Liquor Distributors

Basis for Business License for All Businesses  Business License for taxable businesses provides the City:  Demographic information used by Finance, Economic Development, Police/Code, Development Services, Law, et al  Mapping to ADOR-provided taxable businesses’ demographic and revenue reporting to ensure compliance by taxpayer and ADOR  City approval process maintained

Business License Options Current System – City controls tax and business license applications and collects Tax License and Business License fees – one fee per business New System – ADOR does Tax licensing, sends City tax license fees and some application info to City Scenarios: 1.City keeps complete Business License application and fee from non-taxable only 2.City collects Business License application and $55 fee on all businesses in the City (taxable and nontaxable) 3.City collects Business License fee reduced to $25 from all businesses in the City (taxable and nontaxable) 4.City eliminates Business License entirely

Current Revenue Current Annual Revenues (CY 2013) Baseline : City control of tax and business licensing (baseline)

1.Revenue Impacts Scenario: 2015 – DOR controls tax licensing – City to issue business license only to non-taxable businesses $36,000 Loss of Revenue

2.Revenue Impacts Scenario: 2015 – DOR controls tax licensing and City retains current fee structure and includes the $55 business license fee on taxable business Overall Revenue Increase: $415,000

3.Revenue Impacts Scenario: 2015 – DOR controls tax licensing and City retains current fee structure and includes a $25 business license fee on taxable business and non- taxable businesses Overall Revenue Increase: $141,175

4.Revenue Impacts Scenario: 2015 – DOR control of tax licensing and City eliminates the business license Revenue Decrease: $90,100

Reaching a Decision For City consideration:  The need for an approval process for all businesses  The need for City obtained demographic data for all City businesses  The need to match City obtained business information to ADOR provided information  Recoup City expenses for maintaining a business license  Minimum fee for business license and penalty structure to encourage compliance

Processing the Decision  Modification or elimination of the Business License would require a City Code change via ordinance  Law Department review of any proposed ordinance  Any approved changes should be effective on January 1  Fee changes require final Council approval by September 30 to notify the public and make system changes {End of the Peoria Presentation}

In Summary: Business License Basics  Take the opportunity to help people start business in your town  State the requirement clearly  Make sure it reaches all agencies  Set an annual fee; include financial penalty for failure to pay  Require annual renewal  Include the authority to enforce it

A Question for YOU! What are two instances when a city CANNOT require a Business License?

Business License Restrictions NO BUSINESS LICENSE ALLOWED FOR REAL ESTATE BROKERS, AGENTS, SALESMEN, OR PROPERTY MANAGERS WITH AN OFFICE IN ANOTHER CITY A.R.S Additional business license; real estate broker or salesperson; prohibition A city or town may not require a person to obtain an additional business license to do business within that city or town if the person is a real estate broker or salesperson licensed pursuant to title 32, chapter 20, article 2 and licensed to do business in the city or town in which the person's primary place of business is located.

Business License Restrictions NO BUSINESS LICENSE ALLOWED FOR RESIDENTIAL RENTAL PROPERTY A.R.S Adoption of citywide residential rental property licensing, registration or inspection program; requirements B. A city or town shall not adopt a residential rental licensing requirement for residential rental properties or property owners. This subsection does not prohibit a city or town that imposes a sales tax on rent from requiring a transaction privilege tax license for residential rental property owners. C. A city or town shall not adopt a residential rental registration requirement. A city or town shall obtain rental registration information only from the county assessor's office for the county in which the residential rental property is located.

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