Aneesh Chopra, Federal CTO Discusses Cloud Computing
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]]>Companies can’t afford to overlook licenses, registrations, and permits, or to neglect the payment of taxes and fees associated with them. However, faced with a myriad regulations at the local, state, and federal level, businesses need a managed licensing solution to stay in compliance.
Can your business risk having its doors closed by tax and licensing authorities? Does it have excess capital available to spend on fines or to cover other costs of noncompliance with licensing requirements? How much time and effort can you squander rebuilding your company’s public reputation and customer goodwill if these events occur? Every business—large or small, local or international—has to comply with licensing requirements or suffer the consequences. Unfortunately, compliance can be a complex, time-consuming, and frustrating process.
Keeping licenses in line requires navigating an ever-shifting regulatory landscape involving thousands of bureaucracies, from local municipalities to federal government agencies. It necessitates following differing license and permit procedures that range from sending paper documents back and forth through the mail to completing online forms and making electronic payments.
Additionally, the licensing process doesn’t end after the initial forms are filed. Over time, companies must manage licenses to ensure they remain in compliance. This includes filing periodic reports, reflecting changes in name and entity structure, and acquiring new licenses because of changes in operational activities or because of new regulations levied by government agencies.
This can be a particular challenge today. With companies trimming staff levels, licensing tasks often fall by necessity to employees who are not experts in the process. Even firms that maintain a dedicated compliance department find that their time can be better spent on value-added activities, rather than handling and monitoring a myriad licenses.
Outsourcing the management of business licenses is a proven, cost-effective solution that keeps organizations in compliance. An outsourcing strategy allows companies to control licenses throughout the business lifecycle—from origination, to expansion, to closure—enabling them to:
• Avoid penalties, fines, and legal problems
• Maintain compliant business operations and positive public relations
• Keep the business poised for expansion
• Reduce costs compared to handling licenses individually and internally
This paper will examine the growing need for effectively managing business licenses, detail the benefits of an outsourced solution, and provide insight regarding how to choose a service that best fits your unique business needs.
A Growing Need
Businesses have contended with licensing requirements since the first time a governing body realized there was a way to regulate—and derive tax revenue from—commerce. However, today’s licensing landscape is more complex than ever before, driven by a number of factors.
New legislation and regulation. In the wake of high-profile business failures, the trend in government is to apply more oversight, regulation and licensing, not less. Laws are constantly changing, and keeping up with those changes is challenging and essential. Additionally, faced with budget shortfalls, government agencies coast-to-coast have approved new or increased licensing fees as a way to increase revenue. For instance, the Washington D.C. Council passed new licensing legislation in late 2008 that impacts 10,000 formerly unlicensed businesses1, while the City Council of Palo Alto, California, voted in favor of a business license tax ordinance in order to generate additional funds for the cash-strapped municipality.2
Increased public focus on compliance and transparency. It’s not just government that’s concerned about oversight: stockholders, employees, consumers, and trading partners are also demanding greater accountability, including compliance with licensing requirements. Legislation, such as the Sarbanes-Oxley Act, has also raised public awareness of the regulatory requirements a business faces.
Increased enforcement. Companies have always needed licenses, but government authorities are now stepping up their efforts to ensure business license compliance. For instance, enforcements against unlicensed businesses in Florida increased 64 percent through the first half of 2009 versus the previous year.3Municipalities in particular have increased their enforcement of permits and licenses as local tax funds have dried up and as they look to businesses to make up the shortfall.
Internal cost pressure. Now more than ever in today’s economic climate, companies need to maximize the impact of their staff resources. Managing licenses is necessary but adds no intrinsic value to the business operations. Additionally, many companies have made staff cuts, including in compliance operations, to trim expenses due to stockholder pressure or to respond to an economic downturn, turning licensing issues over to staff that may be ill-equipped to handle them. Outsourcing becomes a viable alternative when staff can be re-allocated to revenue-generating or cost-reduction efforts that provide a real return on investment.
RISKS OF NONCOMPLIANCE
Some companies underestimate the problems that can result from noncompliance with licensing requirements, particularly if they have been operating in an area of lax enforcement. However, failing to effectively manage the business license lifecycle can lead to significant problems and increase risk.
Fines, penalties, liens and interest charges. Financially, the consequences of missed or expired business licenses can be severe. Each municipality can levy its own penalties for noncompliance. Company owners or officers may even be hit with personal liens.
Forced cessation of business operations. If a company doesn’t have the correct licenses or has not paid necessary licensing fees, its doors can be locked by local, state, or federal authorities until the non-compliance violation has been remedied. For instance, in May 2009, regulators shut down two locations of H&H Bagels inNew York City until the company remedied delinquencies in withholding tax filings.4 Customers seeking their morning bagel were instead met with locked doors, and news of the closure was splashed across the pages of print and web media.
Company officials summoned to appear in court. Licensing agencies have the authority to call company management to respond to noncompliance issues in court. Companies can be faced with the unpleasant scenario of having a top officer subpoenaed to a local jurisdiction to answer charges of a missed permit filing.
Negative publicity. Business licenses are public record and violations can become fodder for public scrutiny and attract unwanted press coverage. Forced closures create particularly visible and negative PR. Customer and stockholder perception can be severely impacted. Repairing damage to a company’s name and reputation may be difficult and costly.
Delays in business expansion or changes. Failure to have the correct licenses can require a business to wait on expanding product lines, adding additional services, or opening new locations. Missed licenses can also halt major strategic product launches or alterations in entity structure, or delay mergers, acquisitions, and divergences. Until the proper licenses are in place, the business will not be able to proceed with planned operational changes.
THE CHALLENGES
Even if a business is well aware of the risks it faces by failing to comply with licensing requirements, it must overcome several critical challenges to managing the process over time.
Not knowing the full extent of licenses that are needed. The types of licenses fall into three major categories. General licenses and filings—such as sales tax, workers’ compensation, and payroll withholding—are required of every business. Regulatory permits—such as construction, transportation, and food licenses—are required based on specific business operations and are found in numerous industries and for a myriad of activities. Lastly, local licenses—such as city and county permits and licenses—are applicable based on the type of business and depending on where the company does business. Within these basic categories there is a great deal of variability, creating confusion in connection with what the exact licensing requirements are, or even what the proper resource for information would be.
Dealing with bureaucracies. Having to deal with countless numbers of municipalities, licensing departments, and license types is incredibly complex. Licenses, permits, and tax registrations differ by business type and business location, and each licensing authority imposes its own set of rules. However, agencies often lack a central repository for regulatory information, requiring companies to research web sites, scour paper-based documentation, and visit local government offices to determine the correct resource. Additionally, government agencies are notoriously slow and unresponsive.
Managing inefficiency, budgeting, and cost of the typical licensing process. Generally, each license application requires a separate fee. Handling these fees individually and internally takes time, and the processing expenses incurred may end up being higher than the application fee itself. Additionally, many licensing processes are still paper-based and inefficient, requiring companies to wait for forms to arrive in the mail or to send staff to an agency to obtain forms personally. Most licensing authorities do not post their license online and, even if they do, it takes considerable effort to navigate cluttered governmental web sites. Even those applications that are posted online are usually designed to be printed and mailed, not completed online. Mailing increases both costs and the chance of noncompliance due to mailing delays or delivery errors.
Whether a business is expanding, contracting or simply maintaining operations, annual budget planning must include the costs of all licensing needed to support the strategy of the business. This is a crucial step that is often overlooked in annual planning meetings, particularly when licensing needs are handled by various departments.
Contending with a lack of visibility and accountability. Time-to-market is critical to remaining competitive, but managing licenses effectively is extremely complicated and time consuming, involving acquiring all the correct license applications and accurately filing the licenses with the authorities. Companies struggle to create a clear picture of where all necessary jurisdictional licenses roll up to each location and entity to determine the ongoing licensing needs of the business. Accountability for licenses is often unclear. Strategies of managing licenses range from centralized to decentralized licensing structures and every approach has inherent benefits, issues, and tradeoffs to overcome.
THE SOLUTION
Business Licensing Outsourcing
The dynamic nature of business and the variability and diversity of licensing requirements make outsourcing an increasingly attractive option to address these challenges. Outsourcing business licensing ultimately saves time and money over internal license management, while effectively keeping a company in compliance.
An outsourcing solution should offer support for the entire business lifecycle— not just new operations, but changes to existing operations, additions of new products and services, opening of new locations, consolidations, name changes, and ultimately entity cessation. It should also focus not just on initial compliance, but on remaining in compliance over time: managing renewal filings; providing reminders of important upcoming dates; and auditing licenses to provide identify gaps. The solution should deliver the appropriate level of control that each business desires over the licensing process, from initial research to full outsourcing of all licensing activity.
Research. Some companies prefer to handle preparation and filing of licenses themselves, but need trusted information to identify the specific requirements that apply to their business activities and locations. Research services can also augment work performed by a company’s own licensing compliance staff or respond to a short-term spike in licensing activity, such as when opening a new location or launching a new product line.
Research services generate a gap analysis, verifying whether a company is fully in compliance and, if not, what actions are needed. These services provide clarity around the myriad of required licenses, permits, and tax registrations by putting accurate and relevant licensing information—including licensing agency, form, and payment information—in an easy-to-understand format, complete with the specific applications required for the type and place of business. Such services also analyze the current state of a company’s licenses—verifying that licenses are active and up-to-date.
Preparation and filing. In the next level of outsourcing, a service provider builds on the foundation of research and gap analysis to obtain, prepare, and file licenses on a company’s behalf. These services are ideal for companies that wish to avoid the cost and complexity of dealing with different licensing authorities and government agencies. As with research services, preparation and filing services are also useful for companies contending with urgent needs or temporary increases in licensing activity.
Full outsourcing. Whereas preparation and filing services are designed to be used on an as-requested basis, full outsourcing of the licensing process puts ongoing management of the licensing lifecycle in the hands of a trusted expert. As with preparation and filing, with full outsourcing the service provider applies for all needed licenses, permits, and tax registrations on a company’s behalf after determining what licenses are needed. Additionally, the outsourcer manages renewals and ongoing compliance. It maintains a calendar for all licenses, prepares checks for licensing fees, submits new and renewal applications to licensing authorities, procures license certificates, and forwards those certificates to the client, repeating this process over the lifecycle of the business itself.
BENEFITS
Whether a company chooses research services, preparation and filing, or full management of licenses, outsourcing has proven to deliver several key benefits.
• Avoiding penalties and fees. The best way to avoid penalties for noncompliance is to remain in compliance. Additionally, even if a company does identify gaps in licenses, preempting government action can minimize penalties. Government agencies are much more likely to reduce or even waive fines if a business voluntarily seeks to address permit deficiencies, rather than waiting for authorities to discover them. For instance, Spokane, Washington collected over $106,000 in fees and penalties from unlicensed businesses in 2008, yet created a license amnesty program in 2009 for businesses that fixed licensing problems on their own.
• Maintaining compliant business operations. Taking a “pay the fine” approach is unwise and short-sighted, particularly in today’s compliance-focused environment. Keeping in compliance is a best practice that is supported by license management outsourcing.
• Avoiding legal problems for directors and officers. Transparency and accountability rules increasingly put officers on the hook for corporate errors and omissions. Outsourcing license management provides protection and also helps demonstrate that a company is committed to compliance.
• Maintaining customer goodwill and positive public relations. It takes only one negative event to undermine years worth of brand-building.
• Keeping a company positioned for growth. Full and accurate licensing provides companies assurance that they can expand locations, products, and services without facing licensing issues. Demonstrating compliance via an outsourcing solution also makes a company a more attractive business partner and can position it for beneficial mergers and acquisition opportunities.
• Promoting visibility and accountability. Outsourcing provides a centralized repository of all licensing information, delivering critical visibility into the end-to-end process. A full record of licenses is readily available not just as a matter of best practices, but also for auditing, compliance, and other record-keeping purposes. Additionally, issues surrounding accountability for individual licenses are clarified by shifting the responsibility to the outsourcer.
• Reducing the cost of compliance. A centralized, outsourced licensing service saves time and money by leveraging the expertise and efficiency of a specialist. The outsourcer can also present all applicable licensing requirements in a consolidated format to the client, and reduce the client’s need to produce costly individual checks.
Ultimately, companies look to outsourcing for different reasons. They may lack licensing compliance staff or need to augment the staff they do have. They may wish to avoid the headaches and hassles of dealing with a multitude of licensing agencies. Or, they may simply want the peace of mind that comes with knowing that no gaps exist in compliance related to license and permit requirements.
In an increasingly complex regulatory environment—characterized by ever-changing requirements, stepped-up enforcement, and heightened awareness of compliance—outsourcing to an expert is the best strategy for managing the business license lifecycle.
1 Plumb, Tierney, “Business Licenses Are a Must in D.C.,” Washington Business Journal, January 6, 2009.
2 Sheyner, Gennady, “Palo Alto Business Tax Set for November Vote,” Palo Alto Online News, July 21, 2009.
3 “Unregulated Business Enforcement Up 64%,” South Florida Business Journal, July 21, 2009.
4 Sanderson, Bill, “H&H Bagels Cough Up Bread,” New York Post, May 30, 2009
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