A Note From The Legal Helpdesk: Business License Fees
December 5, 2017
You are the owner/broker for the real estate company named Fiction Realty. You and your licensees sell houses in cities A, B, and C, but your only office is in City A, in One County, Alabama. One day, you receive a letter from a company, Auditor, Inc., on behalf of City B, demanding payment of City B’s business license tax. Do you owe City B money? Have you paid the correct business license tax?
Auditor, Inc.’s Letter
In the fact scenario above, Fiction Realty should only pay business license taxes to City A. Fiction Realty, or its attorney, should contact the company in writing and explain that it only has a place of business in City A and, thus, is not subject to a business license tax in City B. If the situation continues unresolved, an attorney experienced in business license taxes should be contacted.
Business License Fees and Municipal Business License Taxes
First, let’s establish the difference between business license fees and business license taxes. Business license fees may also be called occupational license fees or privilege license fees. This license provides the purchaser with the privilege of doing business in a locale. Business license taxes are completely different and are the taxes a business pays to the government, based on the business actually conducted. This article provides information on state and county business license fees and municipal business license taxes, applicable to real estate companies.
In general, an Alabama real estate company owes a business license fee to the state at an amount based on the size of the city in which the company has a place of business, the county in which the company has a place of business at 50% of the state business license fee, and potentially municipalities (municipal fees not addressed in this article). Also, a real estate company generally owes business license taxes to municipalities, and potentially the state and county (state and county taxes not addressed in this article). A business license tax is owed in any municipality in which the company has a place of business at an amount determined by the municipality and/or as provided by state and local laws.
Specific counties and municipalities may have local laws that impact business license taxes, as well as fees. It is advisable for a real estate company to contact the state and each county and municipality in which the company has a place of business to ensure it pays the correct business license fees and taxes.
State and County Business License Fees
The state and county license fees for selling, buying or renting real estate on commission is based on where the real estate license is located. Both are collected by the probate judge or license commissioner of a county. Ala. Code § 40-12-2. The state portion of the tax is:
- $15 for cities with 10,000 inhabitants or more,
- $10 for cities with 5,000 but less than 10,000 inhabitants, and
- $5 in all other places. (Ala. Code § 40-12-149)
County business license fees are 50% of the state license fee, as follows:
- $7.50 for cities with 10,000 inhabitants or more,
- $5 for cities with 5,000 but less than 10,000 inhabitants, and
- $2.50 in all other places. (Ala. Code § 40-12-2(e))
So, in combination with the state fee above, the probate judge, or license commissioner, of a county receives (does not include an administrative fee that varies by county):
- $22.50 for cities with 10,000 inhabitants and over,
- $15 for cities with 5,000 but less than 10,000 inhabitants, and
- $7.50 in all other places.
The Alabama Department of Revenue’s Handbook of Privilege and Store Licenses (page 81) (issued 10/17) provides the following information on state and county real estate business licenses:
- Real estate agents who receive a W-2 from a real estate company need not purchase the license - only the company.
- A license is required in each county in which a real estate company has an office, but a license for an agency with only one office covers many counties.
- The Department of Revenue applies this section to entities that rent real property for a commission.
Municipal Business License Taxes
Alabama municipalities may impose business license taxes on businesses operating in the municipality. Ala. Code § 11-51-90. A municipality sets the license tax based on a business’s classification. Ala. Code § 11-51-90.2.
For real estate companies, a municipality can base the tax on gross receipts and/or a flat tax, where not state regulated (see note on gross receipts below). Ala. Code § 11-51-90.2(a)(2). Of note, a real estate company only needs to pay a municipal business license tax in a municipality in which it has an office. Ala. Code § 11-51-132.
In general, a municipality cannot base a business license tax on the rental of residential real estate on a per unit basis, unless the municipality was doing so prior to January 1, 2014. Ala. Code § 11-51-90.3. Calhoun County has a local constitutional amendment that prohibits this as well. Ala. Const. Am. 854.
Certain counties have additional laws and/or constitutional amendments that apply to business privilege taxes within the county. These additional laws can restrict a county or a municipality’s power to levy business license taxes in the county. For example, multiple counties prohibit basing a privilege or license tax on the gross receipts of a natural person engaged in an occupation in the county, including Cullman, Dekalb, Jackson, Lawrence, Limestone, Madison, Morgan, and Tuscaloosa Counties.
Jefferson, Etowah and Shelby Counties – Additional Tax
Jefferson, Etowah and Shelby Counties have specific constitutional amendments and local laws that provide an additional business license tax on those who buy, sell, manage, lease, or rent real estate on commission. The fee is to be shared by all municipalities in the county pro-rata based on population. See Ala. Const. Ams. 539, 595, and 684. Local law sets all three taxes - Jefferson County’s additional tax is $22 (Ala. Code § 45-37-244), Etowah County’s is $150 (Ala. Code §45-28-200.01), and Shelby County’s is $29 (local law unknown – information from the Shelby County License Office).
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