Business Licensing Costs in Washington Are Skyrocketing » Publications » Washington Policy Center

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Small businesses (and indeed all businesses in Washington) are experiencing an exponential increase in business license fee costs charged by local municipalities. Many cities now charge business license fees based on revenue, number of employees, and hours worked, rather than a flat fee.

The latest city to consider raising its fees is Tacoma with an increase to $1,000. This is a 400% increase over last year’s fee ($250) for companies with revenues over $1 million.

To complicate the calculation of license fees charged, some cities require counting only the hours an employee physically works within city limits or when a bond is created. State law explicitly restricted a city to require a business license when work is performed outside of city limits, as is the case with many remote service providers.

These costs can amount to several thousand dollars for a small company and several million dollars for large companies.

Using the city of Redmond as an example, the cities of origin commercial license structure was created in 1996 and has been updated the most recently in 2020. For a small business with 5 full-time employees located within the city limits with revenues over $2,000, the annual fee would be 5 x $122, or $610. The initial fee was $10 per employee in 1996 and, through a series of board actions, by 2022 it had risen to $122 per full-time employee, an increase of 1,100%.

For some of Redmond’s largest employers, the costs will run into the millions of dollars.

Source: Washington Department of Revenue

The problem is compounded when companies operate in multiple jurisdictions. For companies that only operate in one municipality, filing is relatively simple. However, for businesses that operate in multiple locations, licensing fees become significant. A company can be located in one city, but must pay license fees in each city where it operates.

The filing process, while more streamlined due to the recent requirement for municipalities to use the Washington Department of Revenue’s centralized system, is complicated by the requirement to calculate the revenue generated in each city as they are physically located within the city limits.

The qualifying requirement for the business license requires the business to separately track hours and earnings for work performed inside and outside the city limits. In the case of a contractor, who can only carry out a minimal amount of work inside the city, this is a heavy administrative burden.

Many companies, due to the difficulty of the licensing process, do not bother to apply for a license, especially if the work being done is minimal or infrequent within the confines of a jurisdiction. As fees increase, the profit from working in the jurisdiction is reduced and the incentive to ignore licensing requirements increases. To further complicate the process, each municipality has different rules, fees, and qualifying processes.

License fees are a hidden cost of doing business and these costs are in addition to the cost of the products and services that businesses provide and in some jurisdictions do not provide any benefit or service to the business as others taxes pay for essential services within the city limits.

High licensing fees destroy jobs and deter companies from expanding into new areas to create new jobs.

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