Licenses, Fees and Excise Taxes - Module 2 of 5

Licenses, Fees and Excise Taxes - Module 2 of 5


Module 2: Licenses, Fees and Excise Taxes 

Federal, state, and, local revenue agencies commonly issue licenses and collect fees in addition to administering and enforcing generally-applicable tax laws. Licenses are required for regulated activities, which vary by jurisdiction. A plethora of federal agencies issue licenses for activities closely controlled by the federal government, but just about any business operating in the United States will need to secure some form of license or other approval from its state to carry out its activities. In this module, we will explain why and when licenses, fees and excise taxes are required for commonly regulated activities.

Licensing for Regulated Activities

             A license (also sometimes called a permit) is a regulatory device that ensures that people comply with the rules and regulations put in place to govern specific occupations, commercial trades, professions and other activities. Licenses and permits are legal devices, and they are administered by government agencies.[1]

Licenses should not be confused with certifications. While the terms are sometimes used interchangeably, certifications typically refer to approvals issued by nongovernment entities, such as trade groups or professional organizations.[2] Unlike certifications, licenses carry the force of law. Holding a valid license entitles a person or business to do something that otherwise would be prohibited, such as driving a car or flying an airplane. Whether a particular activity requires a license or permit depends on several factors, including the nature and scale of activity proposed, whether it is to be carried out by an individual or a commercial entity and which regulatory agencies have jurisdiction. Many municipalities require licenses for regulated activities as well.[3] 

Commercial activities are regulated on the local, state and national levels. States and municipalities license a wider range of activities than the federal government, which reflects the wider latitude states are generally afforded in the exercise of their tax powers. The nature and scope of commercial licensing requirements vary substantially. However, some common licensing requirements apply across several jurisdictions.

First, nearly every business conducting operations in the United States needs some form of license or regulatory approval. With the exception of Nevada, South Dakota and Wyoming, all states levy either a corporate income tax or a gross receipts tax. Anyone generating revenue by selling goods or services to the public should expect to register for some form of business or tax license.[4] This also enables the state to track business revenues for tax purposes.

However, a business license does not automatically enable a company to engage in any type of commercial activity. Many jurisdictions require professional licenses for certain specialized activities to protect the public from health, safety or environmental threats. By ensuring that all commercial establishments follow standard regulations, licensing laws have helped clean up practices across a suite of regulated industries. [5]

Industries that provide goods and services that affect the public health and welfare are often heavily regulated. For example, consider the entrepreneur who is looking to open a new restaurant. Depending on the jurisdiction where the new business is located, the new enterprise may have to secure over a dozen licenses and permits before it is able to serve customers. In addition to state businesses and tax licenses, the restaurant may have to apply for and receive a certificate of occupancy from local safety regulators before opening its doors to the public. The restaurant will also need to pass a health inspection and receive a food service license. Depending on the local rules, the restaurant may also need a liquor license, a permit to hold events or special approval for parking. Some jurisdictions even require pool table licenses, vending machine licenses and dumpster placement licenses.[6] This is all in addition to the extensive system of licensing and taxation that regulates businesses that hire employees. As a result, entrepreneurs are responsible for understanding which commercial licensing requirements apply to their businesses.

Many professional activities require state licensing. In fact, an increasing number of private professions are shifting into regulated industries. While only five percent of professionals reported having to secure a state license in the year 1950, nearly one-fourth of workers surveyed in 2008 required professional licensing.[7] By 2015, occupational licensing affected nearly 30 percent of workers in the United States. As a result of the ongoing expansion in the scope of professional licensing requirements, anyone seeking a new career should look into whether their chosen profession requires a professional license.

Some occupations are regulated as a matter of course. Attorneys, accountants, pharmacists, real estate brokers, doctors and other professions that require specialized training and knowledge, for example, must be licensed by a state professional board. Most states also require cosmetologists, funeral directors, veterinary and alternative health practitioners, nutritionists, counselors, teachers and others whose work affects public health and welfare to secure licenses. Architects, interior designers, engineers and those in construction industries are also commonly regulated to ensure that structures are built with public safety in mind. For this reason, many state and local jurisdictions require any business performing work in home construction, plumbing, electrical systems or HVAC systems to maintain a professional license.[8]

Professional licensing laws have expanded over the years, but there is a slow trend towards de-licensing as lawmakers ease off on industries that have become overcrowded by professional regulations. Still, new professionals in any occupations should be clear on the licensing laws that apply to practitioners in their jurisdictions. [9]

In addition to professional licenses, some jurisdictions require businesses to secure permits before engaging in certain activities. For example, local, state, and national environmental regulations prescribe strict permitting and compliance rules on construction activities. Regardless of whether contractors require professional licenses, activities common in the construction industry – such as disturbing a large amount of earth – may trigger licensing requirements. Likewise, anyone engaged in a business that involves taking weights or measures of items for sale such as wholesale materials, coal or other fuel sources or bulk consumer items, may be required to secure a specific weight and measurement registration.[10]

State and local licensing authority is vast, but it is not boundless. In fact, states are barred from regulating certain commercial activities that fall within the purview of federal authority. Federal laws impose licensing requirements on certain professions and commercial activities just as state and local laws do. In most cases, the federal and state governments share licensing authority. However, state and local regulators are preempted from regulating certain federally-licensed activities according to constitutional federal supremacy requirements.


Federal Licensing and Regulation

While state and local agencies are free to license, regulate and tax most professions and business activities as they see fit, the federal government is the supreme authority in our system of laws. If a state or local law directly conflicts with federal law, it is invalid on the basis of federal preemption. The “supremacy clause” makes this clear, stating that the Constitution and the federal laws passed under it constitute “the supreme law of the land.”[11]

Federal supremacy may be a simple concept, but questions of preemption are seldom cut-and-dried.[12] Many professional licensing regimes are managed at the federal, state, and local levels. For example, many state and local business licensing and registration rules require a federally-issued Employer Identification Number, which businesses must apply for and receive from the IRS.[13]

Professionals in federally-regulated industries must obtain federal licenses or permits before conducting business. These jobs are regulated by federal agencies pursuant to federal laws. For example, the Atomic Energy Act of 1954 established the regulatory regime that gives the federal government the exclusive authority over the safe generation of nuclear energy.[14] States are preempted from imposing improperly-restrictive fees, licensing requirements, excise taxes or other laws burdening the generation of nuclear power.

Where the federal government completely occupies an area of law, state and local governments are generally prevented from imposing licenses, fees or taxes. The state may also be restricted in how it can additionally regulate those areas. For example, the Securities Exchange Act of 1934 established the Securities and Exchange Commission, which sets forth rules and licensing requirements for many professionals in the financial industries.[15] Likewise, the Federal Aviation Act of 1958 established the Federal Aviation Administration, which issues licenses to pilots and airlines authorizing the operation of aircraft, regulates transportation via air and opens up licensing and regulation for air traffic control.[16] In both areas, states’ abilities to further regulate the areas are limited.

Some professional fields are regulated solely by federal agencies. However, in most cases, state and local agencies are free to regulate and enforce their own licensing requirements so long as they do not contradict federal law.

Cooperative Regulation

Several regulated industries must comply with licensing and fee requirements that cross multiple jurisdictions. Agriculture, radio and television broadcasting, commercial fishing and hunting, transportation and logistics, and a suite of other professional activities must comply with licensing requirements imposed on local, state and federal levels.[17] Due to the overlapping nature of many professional licensing regimes, it is critically important that businesses be aware of the laws that apply to professional activities in their jurisdictions.

The licensing and distribution of alcohol is an excellent example of how federal, state, and local agencies work together to enforce a massive system of commercial licensure and fees. The United States has had a long and complex history of alcohol regulation, which once resulted in the Eighteenth Amendment, banning the sale of alcohol altogether.[18] Prohibition proved unenforceable, and the Amendment was eventually repealed.[19] However within two years of the repeal of prohibition, state lawmakers in nearly every state started regulating the distribution of alcohol through state control boards. These state controls proved very effective at regulating alcohol consumption, and since then, alcohol has been a subject of cooperative regulation between the states and federal government.[20]

The federal Alcohol and Tobacco Tax and Trade Bureau regulate a broad set of production, quality, labeling and distribution criteria that apply to the sale, import, and manufacture of alcoholic beverages.[21] Activities regarding the consumption and local distribution of alcohol, however, are regulated by the state or local control board.

Many professional activities are subject to licensing and fee requirements similar to those imposed on the sale of alcohol. Other dangerous products, such as tobacco and explosives, are subject to similar multi-level licensing laws.[22] Often, these requirements are imposed in addition to excise taxes.

Common Licensing Procedures and Requirements

A license is issued following an official process administered by a government authority of proper jurisdiction. They are required by law to perform a particular activity or engage in a certain profession, and as a result they are protected like pieces of valuable property. Licenses are subject to the same due process protections that apply to other official government actions affecting property rights, which means that they are issued and revoked according to processes specified by law.[23]

Some licenses are easily obtained. For example, the process for registering for a federal Employer Identification Number is very simple and usually can be done online for free.[24] Local business licenses and sales tax permits are often awarded following the filing of a few pieces of paperwork and the payment of a small fee. Professional licenses, trade licenses, and local health and safety permits, on the other hand, are commonly only issued when applicants meet many requirements.[25]

While standards and procedures vary by jurisdiction, most professional licenses are issued following some inquiry into the applicant’s experience, training and skill in a particular field. Often, licenses include ongoing requirements for continued qualification, such as work or education requirements. To ensure that these standards are relevant to real-world conditions, professional boards made up of experienced practitioners in the field typically advise state and local regulators on the conditions for licensure.

Anyone looking to start a new business should contact the appropriate state agencies to determine which general licensing requirements apply to them. Online directories can point entrepreneurs to the state licensing agencies active in their jurisdictions, and often they are able to narrow permitting requirements by business activities. When applications are not available online, forms for permits and licenses can be acquired at state or local government offices.[26]

Excise Taxes

Licenses and fees are indirect economic controls designed to curb improper behavior in professional transactions. For the most part, these regulations are designed to ensure standardization, quality and fairness. Excise taxes, on the other hand, are often applied to specific goods, services or activities that the government wants to suppress or limit.[27] For example, governments around the world impose various types of excise taxes on cigarettes. This is partially to compensate governments for the massive public health costs of cigarette smoking, but high excise taxes also raise the price of smoking. These higher prices discourage some people from smoking while also encouraging accountability for the public healthcare costs incurred by people who do smoke.[28]

Excise taxes account for about six percent of all tax revenues collected by state, local and federal revenue agencies, the federal government being responsible for the lion’s share of taxes collected. However, state and local treasuries are more dependent upon the revenues generated by excise taxes. Total sales and excise taxes collected by state revenue agencies account for almost half of state tax revenues.[29]

Excise taxes imposed on transportation make up the largest proportion of all excise taxes. Excise taxes on highway transportation raised about $37.6 billion in tax revenues in 2017, mostly from excise taxes on gasoline and diesel fuel. Likewise, the excise taxes imposed on airline travel raised another $15.1 billion in public revenues from airline ticket taxes, aviation fuel taxes and taxes imposed on air cargo.

The government also imposes excise taxes on some commercial activities that have negative impacts on the public health or welfare, including gasoline, alcohol, firearms and tobacco. The Patient Protection and Affordable Care Act passed in 2010 included a number of new excise taxes, including a 40 percent excise tax on certain high cost employer-sponsored health insurance plans, a 2.3% tax on medical devices, an annual fee charged to manufacturers and importers of branded prescription drugs and even a 10% excise tax on tanning beds.[30]

However, revenues from excise taxes vary based upon consumption, and thus can be unreliable. Rather than a consistent source of public revenue, excise taxes are more often imposed as a penalty on certain behavior. In this regard, excise taxes are just as much instruments of public policy as they are ways to generate public funds.

Conclusion

Licenses, permits, and excise taxes are important policy instruments for regulators on both the national and local levels. Local governments use licensing laws and excise taxes to protect the public health and welfare, but they typically do not generate enough revenue to keep critical local services up and running. The next module focuses on common taxes imposed by county, district and municipal governments to fund local services.

 

[1] License, Black’s Law Dictionary (10th ed. 2014).

[2] U.S. Department of Education International Affairs Office, Professional Licensure, https://sites.ed.gov/international/professional-licensure/.

[3] See, e.g. League of Minnesota Cities, Licensing Generally, Chapter 10: City Licensing, Handbook for Minnesota Cities (Nov. 21, 2018), https://www.lmc.org/media/document/1/citylicensing.pdf?inline=true.

[4] Skott Drenkard and Richard Borean, Top State Corporate Income Tax Rates in 2014, The Tax Foundation (April 30, 2014), https://taxfoundation.org/top-state-corporate-income-tax-rates-2014.

[5] Caron Beesley, How to Find the Right License and Permit for Your New Business, Small Business Association (Sept. 20, 2016),  https://www.sba.gov/blogs/how-find-right-license-and-permit-your-new-business.

[6] Sam Kusinitz, 15 Licenses and Permits Needed to Open a Restaurant, Toast (Nov. 13, 2018), https://pos.toasttab.com/blog/licenses-and-permits-required-open-new-restaurant.

[7] Stephanie Simon, A License to Shampoo: Jobs Needing State Approval Rise, The Wall Street Journal, (Feb. 7, 2011),  https://www.wsj.com/articles/SB10001424052748703445904576118030935929752); Dana Berliner et al, Occupational Licensing Run Wild, The Regulatory Transparency Project (2019), https://regproject.org/paper/occupational-licensing-run-wild/.

[8] U.S. Department of Education International Affairs Office, Professional Licensure, https://sites.ed.gov/international/professional-licensure/.

[9] Robert J. Thornton and Edward J. Timmons, "The de-licensing of occupations in the United States," Monthly Labor Review, U.S. Bureau of Labor Statistics (May 2015), https://doi.org/10.21916/mlr.2015.13.).

[10] See e.g. National Institute of Standards and Technology, Laws and Regulations, Physical Measurement Laboratory https://www.nist.gov/pml/weights-and-measures/laws-and-regulations;see, e.g. Illinois Department of Agriculture, Weights & Measures Program, https://www2.illinois.gov/sites/agr/Consumers/WeightsMeasures/Pages/Weights-and-Measures-Program.aspx.

[11] U.S. Const. art. VI, cl. 2.

[12] See Susan Raeker-Jordan, The Pre-Emption Presumption that Never Was: Pre-Emption Doctrine Swallows the Rule, 40 Ariz. L. Rev. 1379 (1988); see, e.g. Gonzales v. Oregon, 546 U.S. 243 (2006) (affirming state authority to prescribe lethal doses of prescription drugs to terminally ill patients seeking to end their lives despite possible violations of federal law).

[13] Internal Revenue Service, Apply for an Employer Identification Number (EIN) Online, (Feb. 19, 2019),  https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online.

[14] The Atomic Energy Act, 42 U.S.C. §§ 2011-2021, 2022-2286i, 2296a-2297h-13 (1954).

[15] Securities Exchange Act, 15 U.S.C. § 78a – 78kk (1934).

[16] Federal Aviation Act, 49 U.S.C. §§ 101 - 117 (2018).

[17] See, e.g. Internal Revenue Service, Industries/Professions Tax Centers (Feb. 28, 2019), https://www.irs.gov/businesses/small-businesses-self-employed/industries-professions; U.S. Small Business Administration, Apply for licenses and permits, Business Guide https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits.

[18]U.S. Const. amend. XVIII.

[19]U.S. Const. amend. XXI.

[20] Corrine Snow, Cooperative Federalism and Substance Regulation: Lessons Learned from the End of Prohibition, Center for Alcohol Policy (2015), https://www.centerforalcoholpolicy.org/wp-content/uploads/2015/03/Corrine_Snow_Essay.pdf.

[21] 27 C.F.R. §§ 1.1 - 31.234 (2006).

[22] See, e.g. 27 C.F.R.§§ 40.1 - 40.534, §§ 53.1 - 53.187 (2009). .

[23] Carolyn R. Cody, Professional Licenses and Substantive Due Process: Can States Compel Physicians to Provide Their Services, 22 Wm. & Mary Bill Rts. J. 941 (2014), https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1692&context=wmborj.

[24] Internal Revenue Service, Apply for an Employer Identification Number (EIN) Online, (Feb. 19, 2019),  https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online.

[25] Caron Beesley, Run a Home-Based Business? Find the Licensed and Permits You Need, U.S. Small Business Administration, (Dec. 29, 2017), https://www.sba.gov/blogs/run-home-based-business-find-licenses-and-permits-you-need.

[26] Apply for licenses and permits, U.S. Small Business Administration,https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits.

[27] What are the major federal excise taxes, and how much money do they raise? Tax Policy Center Urban Institute & Brookings Institution, Briefing Book (2019), https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise.

[28] World Health Organization, Tobacco Free Initiative, Ch. 2:Tobacco tax levels and structure: a theoretical and empirical overview, https://www.who.int/tobacco/publications/en_tfi_tob_tax_chapter2.pdf.

[39] State, Federal, and Local Taxes, National Conference of State Lawmakers, http://www.ncsl.org/documents/fiscal/statefederalandlocaltaxes.pdf.

[30] Internal Revenue Service, Affordable Care Act Tax Provisions (Dec. 7, 2018), https://www.irs.gov/affordable-care-act/affordable-care-act-tax-provisions#TPFOO; What are the major federal excise taxes, and how much money do they raise? Tax Policy Center Urban Institute & Brookings Institution Briefing Book (2019), https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise

 

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