It has been a common misconception that license fees are form of taxes. It is therefore necessary to determine whether a particular imposition is a tax or license fee. The reason why such distinction is necessary is that certain limitations apply only to tax but not to license fees or that which applies to license fee that does not necessarily apply to taxes.
A tax may be distinguished from a license in terms of five indicators: purpose, basis, amount, time of payment and effect of payment.
Tax is imposed for revenue while a license fee is intended for regulation. The taxes collected are used to meet the objectives of government. Moreover, a tax is for general purposes while a license fee is for regulatory purposes only. The amount collected for a license fee may not be used for any purpose except that which is intended to.
Another point of distinction is that of the basis of imposition. A tax is imposed under the power of taxation while license fee is imposed under police power. However, there exist some instances where the state may impose taxes in the exercise of its police power.
In taxation, the amount is without limit while in a license fee is limited to cost of the license and the expenses of police surveillance and regulation.
As to the time of payment, a tax is normally paid after commencement of business while a license fee is usually paid before. Failure to pay a tax does not make the business illegal while failure to pay license fee makes business illogical.