What Is a Compliance Cost?

Mary McMahon
Mary McMahon

A compliance cost is a cost associated with regulatory compliance that does not contribute to the immediate activities of a business. A business may be able to argue for an exception from regulation if it can demonstrate that the compliance cost would be unreasonable. In this situation it will receive a special dispensation, but will have to get into compliance if it remodels, changes procedures, or engages in similar activities, when the transition would provide an opening to do so.

Man climbing a rope
Man climbing a rope

One example of a compliance cost is the cost shouldered by financial institutions to make sure they file appropriate documents with government regulators, record transactions appropriately, and train their personnel in regulatory compliance. This can be quite expensive and may require hiring new staff members or maintaining an entire compliance department. If the company does not comply, it may lose its license to operate, and thus must shoulder the cost even though it doesn't provide a direct source of earnings or enhance business activities.

Many businesses rely on the services of tax specialists, another form of compliance cost. Sales taxes, value added taxes, and income taxes all require careful record keeping and paperwork. This may be beyond the skills of the business owner, or could be too much work for the business owner to do, so he must hire a professional. The compliance cost is tax deductible, but still adds to the cost of doing business.

Critics may argue that regulatory compliance creates a barrier to entry into the market and may limit competition. If companies must expend substantial time and money on compliance, new companies might find it difficult to get off the ground. Their personnel may lack necessary training or skills. Opponents of heavy regulation can use this argument to suggest dismantling regulations, adding exceptions, or building in a longer waiting period before they take effect.

If compliance costs are a hardship, businesses may qualify for exceptions, but not always. For a topic like tax filing, businesses do not get a dispensation, but might be able to file for an extension if they can show that it is necessary. Businesses that have concerns about compliance costs can discuss the situation with an attorney to see what their options are. If it is possible to file for an exception, the attorney can assist with this process. In a simple example, a business operating in a historic home might request an exception to laws requiring accessibility because the home would be too expensive to remodel. If the business relocates or remodels in the future, however, the exception will no longer be valid, and it must comply with the accessibility legislation.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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