How Does the New Residential Rental Inspection Law Affect City Privilege License Taxes?

Over strenuous objections from some of the state’s largest cities, the General Assembly recently passed new restrictions on municipalities’ authority to conduct residential rental inspection programs.  In a June post, my colleague Tyler Mulligan analyzed the impact of this new law, S.L. 2011-281, with a special focus on how it limits the enforcement mechanisms a city may apply to problem residential rental properties.  Today’s post discusses another important (and possibly inadvertent) effect of the new law:  S.L. 2011-281 may ban all municipal privilege license taxes on residential landlords. 

First, here’s a quick primer on municipalities’ privilege license authority.  (Because counties have no authority to levy privilege license taxes on landlords, I'm leaving them out of this discussion.)   NCGS 160A-211 grants cities and towns broad authority “to levy privilege license taxes on all trades, occupations, professions, businesses, and franchises carried on within the city.”  The statute permits municipalities to tax its businesses in any (reasonable) way they deem appropriate, subject to a number of exemptions and caps that are collectively known as “Schedule B” limitations.  Most of the Schedule B limitations are found in statutes that were repealed fifteen years ago.  Nevertheless, they still control municipalities’ privilege license authority.  For example, the repealed-but-still-effective NCGS 105-89 limits municipal privilege licenses on the sale of gasoline to $12.50 annually.  But the text of the repealed statutes can no longer be found in hard-copy or on-line codifications of the General Statutes, making it terribly confusing for both tax officials and taxpayers alike. (For those of you who can’t read enough about privilege licenses, here’s a copy of those repealed statutes.) Before a city may levy a privilege license tax on a particular business, it must first determine if that business is subject to a Schedule B limitation. If so, then the city may not be able to tax that business at all (for example, attorneys are exempt under NCGS 105-41) or may be permitted to tax that business only at a very low level (for example, $2.50 for the retail sale of ice cream under NCGS 105-102.5).  But if the business is not subject to a Schedule B limitation, then the city is free to tax that business in any reasonable manner it desires.  Some cities rely on flat-rate privilege license taxes, while others levy the tax as a percentage of the business’s gross receipts.  For example, general retailers such as Target or WalMart are not covered by Schedule B limitations for most of the stuff they sell.  The city of Creedmoor levies on these merchants a flat-rate tax of $100, while nearby Durham charges a percentage of gross receipts ($50 for the first $15,000 in revenue and then $.50 for each additional $1,000 in revenue).  Landlords do not fall under any of the Schedule B limitations, meaning a city could tax both commercial and residential landlords at any (reasonable) rate it wishes.  A city could choose to tax landlords under a tax classification just for landlords or it could tax them under a general service or miscellaneous category. Or at least that was true until S.L. 2011-281 became effective on June 23.  The new NCGS 160A-424 created by that law prohibits a city from levying “a special fee or tax on residential rental property that is not also levied against other commercial and residential properties.” Problem is, it’s not clear exactly what kinds of taxes this provision bans.  Without question, property taxes would not be affected by the new statute because all private property owners pay property taxes regardless of whether they rent out their properties.  But privilege license taxes on residential landlords could be in jeopardy, depending on how broadly the statute is interpreted. Read most broadly, the new provision could ban all privilege license taxes on residential landlords, regardless of how they are computed, because property owners who do not rent out their properties are not charged the same privilege license taxes.  Read most restrictively, the new provision might not affect privilege license taxes at all because such taxes are on the privilege of doing business as a landlord. The statute appears to ban only taxes on the residential rental property itself.  Or the provision might be interpreted somewhere in between these two options.  Because the statute bans only “special” taxes on residential landlords, perhaps it affects only those privilege license taxes that classify landlords under a distinct and “special” tax category.  Under this interpretation, a city could still tax residential landlords under a general service or miscellaneous tax category that also applies to businesses other than residential landlords. So what’s a city to do? The most conservative approach is to assume that the new NCGS 160A-424 bans all privilege license taxes on residential landlords.  A city that chooses this approach should amend its privilege license ordinance and tax schedule to exempt residential landlords as of the 2011-12 tax year.  Commercial landlords can still be taxed without concern for the new law. If a city wishes to be more aggressive, I recommend that residential landlords be taxed under a general service or miscellaneous category rather than under a special category just for landlords (or even worse, a special category just for residential landlords).  And I strongly advise against a tax that is calculated on a per-property basis, because such a tax seems to be based more on the residential rental property than on the residential rental business. One final question: if the courts were to strike down municipal privilege license taxes on residential landlords under S.L. 2011-281, would refunds be required?  The same principles I discussed in this post concerning the potential for refunds of privilege license taxes on internet sweepstakes businesses would apply.  If privilege license taxes on residential landlords were ruled illegal as of June 23, 2011, the effective date of S.L. 2011-281, then cities could not levy privilege license taxes on those landlords for tax years that began on or after that date.  Many cities’ privilege license tax years mirror the fiscal year and run from July 1 to June 30; for these cities, refunds would be due for the 2011-12 tax year but not for the 2010-11 tax year.  If a city’s 2011-12 privilege license tax year began before June 23, 2011, then the city could levy its full privilege license tax on residential landlords for the privilege of doing business from the start of the tax year through June 22.  No refunds would be due, in my opinion.