How Governments Detect Business License Scofflaws

The popular Oxford dictionary defines “scofflaw” as “scoff·law  - /ˈskôfˌlô/ - Noun - A person who flouts the law, especially by failing to comply with a law that is difficult to enforce effectively.” What a fitting definition for business license scofflaws. Business license non-compliance is rampant. And one of the reasons is precisely because governments have found it difficult to enforce it effectively. This is quickly coming to an end though. Governments are finding new and innovative ways to enforce and to penalize business license scofflaws.

Business licenses are imposed by the federal government, states, counties, and municipalities. Compliance and enforcement differ on various levels.

Licenses imposed by the federal government deal primarily with a higher level of regulatory compliance.  Few are willing to mess with the feds. The federal government also has an easy way to detect business license non-compliance since most everyone registers for payroll. Consequently, federal business license compliance is highest.

State and county business license compliance is also more prevalent.  Most, if not all, businesses recognize that without some form of registration they will be unable to operate. They cannot form corporate entities unless they incorporate or form some type of legal entity, which also entails registering with the secretary of state and filing annual reports and good standing certificates.  Companies are also well aware that in order to pay or collect sales and use taxes they must apply for sales tax permits. Once a company shows up on the governmental radar, licensing authorities can easily detect it and tell whether it is in full compliance.

However, business license compliance on the municipal level is a whole other story.

First, companies operating in multiple locations find it very difficult to comply with every licensing authority in every location and for every product and service, as there are 200 different license types, and 74,000 licensing authorities. Since some companies have no other business with these municipalities, they assume that they can operate under the radar. And for a long time, they got away with it.

In a quest for every last bit of revenue, licensing authorities are resorting to new tactics to detect business license non-compliance. These include scrubbing yellow pages, walking malls and Main Street, and asking states and counties to share their corporate tax and registration rolls. They even search the news media to find out about companies are operating in their jurisdictions.

The Arizona Daily Star recently ran an article entitled “Licensing Crackdown Boosts City Revenues.” In it, the article expounds:

With city officials estimating that one in four businesses is unlicensed, an effort to crack down on them has pumped more into city coffers over the past year.  Two revenue investigators were hired and two internal auditors were lent to the city's finance department to be more aggressive in identifying businesses that are unlicensed. Investigators scour the Yellow Pages, skim contracting lists and scan media reports to check business names for licenses.  When businesses bid for contracts with the city, they're now required to demonstrate proof of licensing.  When businesses pull zoning permits, they're also now required to show licenses.

"We want the word to get around that the city is being more aggressive about collecting what's already on the books," said the city's revenue administrator, Ellen Hitchings. "If we are good about collecting what's already out there, maybe the city won't have to consider new revenue sources."

You can no longer allow yourself to be lulled into a sense of security if you operate out of a hidden bunker, in a non-descript building, in a huge metropolis. The government’s long hands have a way of reaching into nooks and crevices, and once they detect you, they will punish you severely, even if just to teach other scofflaws a lesson.