Why are Small Businesses Still Paying for the War of 1812?

by John Kiernan on September 19, 2012

As a small business owner, it’s easy to use a given state’s low corporate tax rate as a reason to base your operations there.  By doing so, however, you’ll be failing to take into account taxes assessed on a local level, which can cost you big time.

Take Virginia, for example, which has a tax rate of 6% that the state proudly showcases on its website as being one of the lowest in the nation.  What you won’t find in this glowing write-up is information about how you’ll also be footing the bill for a war long since concluded.  You see, the Virginia Business, Professional and Occupational License (BPOL) tax started as a way to raise money for the War of 1812, but now this tax on the gross receipts of Virginia-based companies serves primarily as a thorn in the side of small businesses and a way to fill the coffers of local municipalities.

The question therefore is what overall effect does this pesky law have on local economies?  And are there any other such hidden taxes in other localities around the country?

For starters, the BPOL tax is the fourth most important tax for local governments, ranking only behind the real estate tax, personal property tax, and sales tax and accounting for 6.4% of tax revenue for Virginia cities, 4.0% for counties, and 12.2% for big towns, according to a Virginia Retail Federation Study.  It is assessed at a local level, rather than being handed down from Richmond, and it rakes in millions each year, allowing governments to fund any number of initiatives.

However, it is also driving businesses out of the commonwealth, especially those that operate on a national level from a single location.  No company wants to pay a hefty tax on its nationally-earned revenue, regardless of whether it makes money or not.  That’s right, as long as a business meets a minimum earning threshold, it is subject to the BPOL tax even if it doesn’t turn a profit.  And given the geography of Virginia’s business community – with large segments located within a stone’s throw of Maryland and the District of Columbia – the cost of relocation often pales in comparison to the ongoing tax burden posed by the BPOL levy.

The BPOL tax accounts for 0.36% of a company’s total revenue, which means that a company with a 10% profit margin would be paying a 3.6% surcharge, making Virginia’s supposedly wonderful 6% tax rate effectively equal to 9.6%, without even factoring in other local taxes and fees. Using the same logic, a company with a 5% profit margin would end up paying a whopping 13.2% state tax.

Moving company operations seems especially attractive when nearby destinations roll out the proverbial red carpet in encouragement.  D.C., for example, offers a number of tax incentives to qualified companies who relocate to the District and employ city residents.  One such incentive enables high technology companies who move to designated development zones to escape sales and use taxes, certain property taxes, and both D.C.’s corporate franchise tax and its capital gains tax for five years.  It also affords companies additional tax deductions as well as tax credits for employee wages and relocation costs.

So, it’s a choice between being punched in the gut by Virginia’s BPOL tax or being wooed and basically having money thrown at you by the state’s neighbor?  Tough choice, but I’d hazard to guess that most companies would choose the latter option, if available.  But what about businesses who cannot easily move?  Are they supposed to just deal with this added burden?

One would therefore think that the money lost to local governments as a result of local businesses packing up shop would outweigh the benefit of maintaining this oppressive tax, but it seems that decision makers are keeping their heads planted firmly in the sand and are actually considering expanding it to the few municipalities that do not charge this tax.  According to the King William County (VA) website, “The county’s consulting economic development specialists do not believe that a BPOL tax would put King William County at a competitive disadvantage and, therefore, it should not be a deterrent to economic development. … Many of their client localities have a BPOL tax and have not found it to be an impediment to economic development. Rather, geographic location, transportation and utility infrastructure, labor and compatible zoning considerations are often the most critical industrial site selection considerations. Furthermore, all but two of the approximately three-dozen counties and cities located along Virginia’s “Golden Crescent” (that is, the Interstate 95 and 64 corridors encompassing the Northern Virginia, Richmond and Hampton Roads metropolitan areas), have a BPOL tax.”

Ultimately, while those of you living outside the DMV (District, Maryland, and Virginia) might not be concerned by the inner workings of local government and the quest to lure businesses and the jobs they bring, the truth is such dynamics are likely in play across the country.  So, if you’re a small business owner trying to decide where to establish your company’s headquarters, make sure you pay close attention to not only a state’s taxes, but those charged at the local level as well.  Otherwise you could find your business’ growth hindered by a war that ended almost 200 years ago.

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