What Are Privilege Taxes?

A privilege tax applies to those who receive a certain privilege from a government, such as a professional license, a corporate license or a license to import or export goods. This is different from an income tax, which is a percentage of the income of an individual or business, or a property tax, which is based on the value of a vehicle, building, land or other property.

Flat Rate

Professional privilege taxes are often assessed as a flat fee. A state may charge every barber a $100 tax each year for the privilege of cutting a client's hair in the state. The state may set a different rate for another profession, such as charging a surgeon $500 a year, or it may charge a flat rate to every professional.

Recurring Tax

A privilege tax is a recurring tax. Some types of privilege taxes operate like sales taxes and apply to every transaction, and other taxes like professional privilege taxes are assessed periodically, such as once a year. This is different from a one time incorporation or registration fee, which the business only pays once.


Because a privilege tax applies to the privilege of doing business in a location, a state or city government may not charge a privilege tax on income a business or individual earns outside its jurisdiction, such as in a foreign country. If a trading company has operations in multiple countries and earns a portion of its income in the state that assesses the privilege tax, the state only assesses a tax on that part of the company's income.


A transaction privilege tax applies to retail store purchases, and it is usually a percentage of the bill. A transaction privilege tax operates like a sales tax, but the customer is responsible for paying a sales tax, including online purchases, and the merchant is responsible for paying a transaction privilege tax, according to the city of Chandler, Arizona. Sales to certain groups of customers, such as members of a recognized tribe, out of state residents and government agencies, may be exempt from a state transaction privilege tax.

Business Registration

Because the state charges a privilege tax for the right to conduct business, a business does not need to be operating to incur this tax liability, if it was previously registered in the state. A company may have to pay some privilege taxes even if it incurs a loss. A business owner needs to formally disband a business entity that is licensed to operate in a state, such as a corporation or a limited liability company, to end his responsibility to file and pay a business privilege tax.