Most cities require all businesses (including home businesses) to register with the city’s tax collector, regardless of business type, structure, size, or name. Businesses located in rural, unincorporated areas must usually register with the county clerk rather than a city tax collector. Depending on where you register, the locality may use different names for the process: tax registration, business tax application, business license application, or tax certification, for example. True licenses are typically administered at the state level. Certain businesses must obtain them if they engage in regulated activities, such as selling alcohol or cutting people’s hair. Getting such a license often involves taking a test or otherwise proving you’re qualified to do a certain activity.
Your tax registration certificate is not the same as a specialized license your business might need—such as a permit from the local health department for handling food, from the Federal Communications Commission for broadcasting over the radio waves, or from a regional air management district for emitting particles into the air. Whether or not you need one of these licenses or permits, you’ll still need to get a tax registration certificate.
The reason you need to register with your local tax collector is that, just like the federal and state governments, your local government wants a cut of your business income. The tax registration requirement is basically your local government’s way of keeping track of your business so that it will be able to collect any taxes due.
Cities and counties have been known to tax businesses with even more flair and creativity than the feds or the states. Localities tax businesses based on criteria such as net profit, gross income, number of employees, total payroll, number of vehicles, number of machines, and sometimes even seating capacity.
In addition, most cities categorize businesses and use different tax structures for each category. According to the structures recently in place in Charlottesville, Virginia, for instance, bakeries are charged a 0.2% (0.002) tax on gross receipts, landscapers pay a rate of 0.36%, and architects and other professionals pay a rate of 0.58%. Other types of businesses in Charlottesville pay flat fees, such as wineries ($500 per year), coin machine operators ($150), and fortunetellers ($1,000).
In addition to being assigned a category and a tax rate, businesses may be subject to special taxes for particular activities. In Chicago, for instance, businesses that sell soft drink syrup or fountain soft drinks must pay an extra “Fountain Soft Drink” tax of 9% of the syrup price, and businesses that hold performance events must pay an extra “Amusement Tax” of 4% or 8% of the admission price, depending on the type and size of the event.
For the privilege of registering to pay local taxes, you’ll usually have to pay an annual fee, which varies a lot from city to city. To register in Philadelphia, for instance, you’ll need to pay a fee of $250, while Seattle charges only $90. Sometimes the annual fee depends partly on how much tax your business is expected to owe the following year, based on city (or county) tax rates. If the fee is based on estimated taxes, at least part of the registration fee may be a nonrefundable administrative fee. In that case, the other part of the fee will go toward paying your estimated taxes or will be returned to you if your taxes turn out to be lower than expected. In Oakland, California, for instance, registering your business with the city costs $30, but you must also pay your estimated tax based on your business category and your estimated income for the next year. The estimated tax portion—but not the $30 fee—will be credited toward your tax bill for the next year. Local rules can change without notice. Be sure to check with your local office for the most current rules and rates.
For your city’s requirements, call your city tax collector. Look under “Tax Collector” in the city government section of your telephone book or check online. The tax collector’s office will be able to provide you with the forms necessary to register in your city, as well as any breakdown of business categories and tax tables. If you’re doing business outside city limits, call your county clerk, usually listed under “County Clerk” in the county government section of the phone book.
Excerpted from The Small Business Start-Up Kit, by Peri H. Pakroo (Nolo).