SR-5-A (13)
e
'2 tJ~ - 0/'$
e
It () f)
70 S-- A
OCT 2 5 1983
~,
California 2- ~ d
CM:MS
City Counc~l Meet~ng: October 25, 1983
Santa Mon~ca,
TO:
Mayor and C~ty Counc~l
FROM:
C~ty Staff
RE:
Business License Tax Ordinance Changes
INTRODUCTION
The purposes of th~s memorandum are: (1) to descr~be recommended
mod~flcatlons to the City-Chamber Compromlse: (2) to compare the
tax rates assumed for budgetlng purposes wlth the modified
Clty-Chamber compromlse proposal tax rates: and (3) to respond to
concerns and questlons ralsed by Clty Council regard~ng business
license taxlng practlces and proposed ordlnance changes at its
meetings of September 27 and October 18.
MODIFICATIONS TO CITY-CHAMBER COMPROMISE
The City-Chamber ComproI~se provlded for an lncrease in the tax
rates for Contractors/Subcontractors.
Since the tax rates on
th~s sector had been historically linked with the services
sector,
the comprOffilse provided for tax rates to be lncreased to
re-establlsh thlS equivalency. However, upon further reVlew lt
was reallzed that the comproffilse rates of $3.00/1000 ~n gross
receipts over $100,000 were higher than our comparlson cltles.
Effectlve tax rates ln our comparlson clties are a functlon of
both the tax rate and the gross recelpts deflnitlon.
In Los
S-A
1
OCT 2 5 1983
e
e
Angeles and Culver City, the tax rate is $1.00/1000 and the gross
recelpts deflnition expressly includes payments to
subcontractors. In Beverly H~lls, the tax rate is $1.25/1000 but
the gross recelpts definltlon excludes payments to
subcontractors. The recommended def1n1t1on of gross recelpts 1n
Santa Monica is comparable to that in Beverly H111s. Therefore,
1t appears most comparable to adopt a tax rate Wh1Ch 1S also
comparable to Beverly Hills. The mod~f1ed C1ty-Chamber
Comproffi1se establ1shes un1form ffi1n1mum tax rates of $SO, taxes
receipts from $50,000 to $100,000 at $1.00/1000 and taxes
recelpts above $100,000 at $1.25/1000.
To partla11y offset the revenue loss of $73,650 resulting from
reduc1ng the tax rate on contractors/subcontractors, the mod1fled
C1ty-Chamber Compromlse prov1des for no tax decrease for reta11
or manufactur1ng/wholesale firms. Instead of exempting the first
$250,000 from a gross receipts tax, the currently effect1ve tax
rates of $.60/1000 for retail sale and $.50/1000 for
manufactur1ng/wholesale are to be applied to gross rece1tps
between $50,000 and $250,000. When comb1ned w1th the new m1nimum
tax rates of $50, the effect 1S to result 1n no net lncrease or
decrease 1n taxes paid for gross receipts between $50,000 and
$250,000 for any affected f1rrns ~n these sectors. Firms between
$10,000 and $50,000 ln Slze would pay up to $25 more due to the
mlnlmum tax rate change; th1S effect ~s no dlfferent than was
anticlpated under the Clty-Charnber Compromise.
2
e
e
Due to the time constraint, 1t was not feasible to request that
the Chamber representat1ves reconvene to formally reconsider
these modif1cat1ons. Tom Nitt1, Chair of the Chamber Legislat1ve
Committee, met w1th the Mayor and C1ty Manager to d1SCUSS the
modif1cat1ons. Mr. Nitt1 1ndicated that wh1le he could not
off1c1ally endorse the changes for the Chamber, he bel1eves the
changes are cons1stent w1th the articulated policy pos1t1ons of
the group.
COMPARISON OF BUDGETED TO RECOMMENDED TAX CHANGES
The d1fferences between tax rates used for budgeting purposes and
those recommended in the mod1f1ed C1ty-Chamber Compromise can be
summarized:
o M1n1mum Tax Rates are uniformly set at $50 for each business
sector affected by the changed tax rates, except Auto Sales for
Wh1Ch the minimum rema1ns $100.
o Small Business Recosn1t1on 1S extended to
Profess1ons/Occupations/Services f1rms, to Commerclal Rental
firms and to Contractors/Subcontractors by a reduced tax rate of
$1.00/$1000 for the f1rst $100,000 of gross recelpts and is
prov1ded for Reta1l Sales and Manufacturlng/Wholesale f1rffis by
tax1ng the first $250,000 of gross receipts at the currently
effect1ve rates rather than exempt1ng the flrst $500,000 from
gross rece1pts taxat1on.
3
e
e
o Gross Receipts Tax Rates for Contractors/Subcontractors are set
equal to the rate charged by Beverly H1lls wh~ch applies a
similar definit10n of taxable receipts. The gross receipts tax
rates for other sectors remain at the level assumed for budget1ng
purposes.
o BUS1ness Sectors are affected by the compromise:
Savlngs and
Loans
tax
rates are not lncreased as had been assumed:
Contractorsjsubcontractos tax rates are lncreased, which had not
been assumed: and Auto Sales flrms are treated exactly as had
been assumed in budget1ng.
A detalled comparlson of these changes 1n tax rates is presented
In Attachment A.
QUESTIONS/CONCERNS RAISED BY CITY COUNCIL
Notlflcatlon To Businesses Llcensed Under Section 6237
As requested by Counc1lmember Reed, owners licensed under Sectlon
6237 of the Mun1clpal Code have been advised that City Councll is
conslderlng bUSlness llcense tax changes which would affect thelr
buslness. Although separately categor1zed In the ordlnance, the
tax rate on these flrms 1S linked to reta1l sales flrms. A total
of 43 businesses llcensed as resthomes, homes for the aged,
prlvate day schools, day nurser1es, day nursery schools, prlvate
board1ng schools or chlldren's boarding homes were sent the
letter presented as Attachment B.
4
It
e
Payments By Ut~l~t~es
Ne~ther Southern California Gas (SCG) nor Southern California
Ed~son (SeE) are currently pay~ng bus~ness license taxes ~n Santa
Mon~ca. The F~nance Director has ~dentlfled a sect~on of our
franchlse agreement wlth SCG wh~ch apparently precludes the C~ty
from collecting a l~cense tax from thlS utll~ty. There appears
to be no legal reason why SCE should not pay a bus~ness llcense
tax for lts operations with~n the City. Representatives of SCG
and SeE have lnd~cated informally that should the utilltles have
to pay a business license tax:
(a) They wlll probably have to go to the PubllC Utllity
Commission to seek a rate lncrease to cover the addltlonal
cost.
(b) The addltlonal charge on the user's bill would most
llkely be labeled "City Tax Increase" or words to that
effect.
(c) They would probably seek to limlt the lncldence of the
tax to only Santa Monlca customers. City staff has not
determlned whether or not SCE could successfully follow
through on these ltems.
Group W Cable pays a small business license tax based upon ltS
receipts for televlslon publicity sales and studl0 rental. The
Clty'S franchlse agreement appears to preclude the Clty from
collecting a llcense tax on cable serVlces provided.
5
e
e
The City Attorney has been asked to provide legal gU1dance as to
whether any of these f1rms should be charged license taxes.
There are no proposed changes to the ordinance regarding taxation
of these utilities.
Tax Cap for Auto Sales F1rms
It is due to the low profit marg1n and the potent1al costs of
reduced auto sales, f1rm clos1ngs or f1rm relocations that staff
have recommended placing a cap on bUS1ness 11cense taxes for auto
sales. The before tax prof1t margins of auto reta1lers and
camper retailers are the lowest of all retailing industr1es
reported 1n the Robert MorrlS Associates 11180 Annual Statement
Stud1es."
Th1S
provldes
firms
with a strong 1ncent1ve to
Slnce automobiles are durable
pass-through
goods sold
taxes to consumers.
1n
a reglonal market, it 1S relat1vely more 11kely
w1Il be pr1ce sensitive. This could result 1n
that
consumers
establ1shed cl1entel shifting to dealers outs1de the westside
area 1n order to realize savings. Santa Mon1ca dealers may, as a
result, sell fewer cars, close or relocate.
The auto sales flrms 1n Santa Mon1ca contrlbute, 1n aggregate,
approx1mately $2.9 ffilllion 1n sales tax revenues to the City
annually: th1S represents approximately 25% of the City's total
sales tax revenues. Based upon a return to the C1ty of 1% of
sales tax revenues, a reduct10n of ten auto sales at $8,000 each
would reduce City revenues by $800. If one of the larger
dealersh1ps e1ther closes or relocates out-of-town, the City's
annual sales tax revenues may drop by $200,000 or more.
6
e
e
Defln1tion of Gross Recel~ts
Whether or not to further limit the taxable gross recelpts of
firms 1n Santa Monlca ralses both legal and publlC POllCY 1ssues.
The revenue impact of each alternative cannot be estimated
because lt 1S not clear what deflnltion firms have used in
reportlng gross recelpts to the City: additlonal informatlon
would be needed from businesses to determlne the amount of
receipts excluded or lncluded by each alternatlve.
Those flrms who have made inqulrles of Clty staff reportedly have
been advised to take a llberal approach WhlCh corresponds to the
October 25, 1983 ordinance deflnltlon 1n excluding receipts from
tax calculations. ThlS history of admlnlstrative practice
suggests that the potentlal revenue reductlons from CodlfYlng
exclus10ns from taxable recelpts would be negllglble.
The proposed ordinance submitted for flrst reading on October 25
has been written to allow for a set of exclusions from gross
recelpts most comparable to that provlded by Beverly Hills. ThlS
provides for formal endorsement of a public POllCY poslt1on which
apparently conforms to current lnformal practice. Moreover,
these changes signlflcantly lmprove the apparent equity and
reasonableness of the tax structure.
Developlng Apportlonment GUldellnes
A separate
provide Clty
staff report and
Council wlth the
resolution will
opportunity
be prepared to
to adopt general
7
e
e
guidellnes
for staff to apply In developlng apportlonment
standards.
Asking
Clty
Counc~l
to speclfically enact and lnterpret
apportlonment standards and rules of appllcat10n can be equated
to asking the U.S.
Congress to vote on IRS regulations.
Apportionment lssues are dynamic over time as well as inherently
complex.
Attemptlng to define standards by ordlnance would
create tlme-consuming and hlghly technlcal set of reoccurrlng
problems for the Council, staff and local bUSlnesses.
The Chamber of Commerce has been 1nvited to participate ln a
worklng group wlth Clty Staff for the purpose of reviewing to
review proposed apportionment gUldellnes as they are drafted.
Ralph Andersen, a recognlzed expert on buslness license taxatlon
ln California, has been enlisted to assist in developing
apportlonment guidellnes.
It is envisioned that the Chamber-City
worklng group would meet biweekly to review proposed guidelines
after the ordinance changes are enacted. A tentative schedule is
~
provided ln Attachment C. The target date for development of
apportionment standards 1S January 1984.
Locally-Owned Businesses Versus Chaln Stores
The City Attorney has stated that there are legal prohlbltlons
agalnst
establlshlng tax rates WhlCh dlfferentiate between
bUSlnesses on the baS1S of whether or not the owners are local.
Therefore, there does not appear to be a legally acceptable basls
8
It tit @
!-I
<ll
+J
lI"I 4-l
::l::: cord
X ~ I <ll
n:I 0 0 0 a 0 0 "J'!-I a
E-t 00 a 0000 0000 000 0 rom 00 a
00 0 0000 0000 000 0 O'\..c 00 a
0::: 0 .. 0 0 ..0 .. 0 "0 .. 0 "0 0 .. r-l +J 0 .. a
..:e (;) .-10 r-l .-I 0 .-I 0 r-lO.-lO .-101"'"'1 r-l X .-10 .-l
.......0 - .......ll'l.......0 .......lI"I_O .......0....... .......ttloo- .......0 ....... ..c:
+J 0...-1 0 U"l N lI"I lI"I ONOLJ1 1.fl r-l l.'l 1.fl800C> 1.fl ...-I 0 U
I:: ~" 0 ~J\~I\ ~,,~!\ ~ 1'\ ~ N LOOS N <llO ~
<ll 'X .. "CO . ^ t:t. c: . .c:
.2 C"'l~ M r-l~...-IO:: ......c:::...-I1l:: r-q::::: .-l .-IttlNIJ1Ul ...-10:::_ OM 3:
(l)-t? <Il- (I)- ~~HIl- t? -(J)-t?<Il-t? -(J)-r:,:)<Il- vr~-(J)-V>-- <n-t?Z zvr
U (U
n:I Ul
+J .~
+J e
,,::( U1 0
lJl lo..I
<ll I:: CU 0..
1::0 +J E
-r-! -r-! rd 0
U1+J !-I U
;:::I-r-! 0 iC a 0 iC a a 0 0
~ I::Q~ 00 0000 0000 00 00 +J l-l
Ul 00 0000 0000 00 00 res <ll
H 1""'10 0 .. 0 ..a .. 0 ..a ... 0 .. 0 .. .-I ..0
:E: r-lU .--l0 "-;0.--10 r-l 0 r-l 0 1"'"'10 .-t 0 4-l =
0 n:I <ll .......0 .......lI"I.......O .......lI"I.......O _0 .......0 iii
0:; e:o::: Or-l ONOIJ1 ONoLl"l 0..-; 0.-1 0 .c:
J:4 U) ~~I <:J ~ \J\ ~ \JI U; ~I ~ 'II o ~I (].I <ll <ll ~~I ,,::( a (l) u
:=: s:: . s:: s:: s:: .--IS::::: I
Q .-tll:: 0 oO:;OC!:; 00::00:: r-lO::O 0 0 .-10:;_ -u1-0 >t
U -(J)-t:l Z <Il-t:l<n-t:l {l)-t,;){,I'}~ i,/}-t,;)Z Z Z {,I'}t,;)Z '-'Z +J
r-!
0:: U
~
a:l <ll
~ ;::::
+J
...
-
U 0
I Cl +J
~ r.::I X
8 E-t n:I s::
H ~ E-t 0
U t,;) 0 0 iC 00 'r-!
Q 0 0 0 U') 0 IJ1 0 Ll"I 0 0 0 ,,::( 00 +.I .
::> c: Ll"I N L('J N If) N ll'l N r-l .-I IJ1 ....... .-I .-I rd+J
U) III -r-i <'')0 V>- i,/}- {,I'} V}- i,/}- V}- V}- (Il- V}- i,/}- Z i,/}- i,/}- U H
Pil ~ .~ 0
8 tI) 4-10..
~ ::> r-! Q)
U) 't:l lo..I
0:: 0
X ~ e;4-l
,,::C > 4-1
8 res cG
+l
~ M l""l M ("f") 1""1 M +J (I.l
0 !-I co H co !-I co l-I co !-I co !-I co l-l c:
<ll - <ll ....... 0) ....... 0) ....... aJ ....... Q) ..... <ll <ll't:l
Z ~ \0 ~ \0 ~ \0 ~ 1.0 ..0 1.0 ~ \0 ~ Ul OJ
0 = 0);::::
U) s::::: lt1 't:l ttl "CI n:s 't:l (j 't:l n:I 't:l n:I 'tl rd"CI !-I U
H n:I ;:::: 0) ..c: III ..c: C) ..c: Q) ..c: <ll ..c:: <ll ..c<ll o..n:I
0:: r-l U .;.J U .;.J U .;.J U +J U +J U +J U+J Q,I+J
..c lJ.l I Q} I (!) I Q} I (!J I <ll I ill I Q,I !-I+J
C4 >t l;'l >, 0' >t tJ'l >t C"l >t O'l ~ tJl >ttJl n:I
:::: +J 'd +J 't:l +J 'tl +J 'tl +J 't:l +J 'tl +J"O <ll
0 -r-! ::I -.-I ::I -..-I ::l .~ ::l r-! ::l r-! ::l -~ ::I l-l <ll
U U co. U ;Xl U J:Q U ~ U CO U CQ UCQ <ll,c
..c=+J
"CIS::
l-l U1 0)-.-1
0 U1 s:: .+.1
+J ....... !-I lt1 s::'t:l
U..-. r-l _ ill .......0 0 0) (U
O)(Il ltl Ul r-l (Il+J ~ U1 s::
UlE: s:: s:: n:s r-l (/] H 0 <ll ~
l-I o 0 tll n:I C) o !IS 14 H m
rnr-l -r-! -.-I (/] (]) '.-1 .-I +JH 0...-1
Uli:t.t Ul+J Q)...... r-l U n:I U+J..-. (I.l 0..
Q) Ul!lSU<1'I r-l 0 !-Ir-l m rdS::r-l O'l m X
CLI-i ll.l o..r-I <1'1 -r-! 0 ..c:: ..-. <llttl....... HOr--- s:: Q) <ll
'r-! 0 LI-i ::l :> 1""1 n:I N :s: 1"'"'1 ~+JO 0 ..-. +JOM -.-I ..... +J
rn o () !-I .. +J 1"'"'1 ....... 1.0 s::~ +J "" l::.Q .. >0'\ n:I Ul
:::s- 14()Q)M <ll N ~ ~ C<llr-- :::s qo O::sqo njN 0:: -,-i
1Il'-' C4QUl'-' 0:: :::: UO::'-' ,.:C OCl)'-' u:l '-' -lit
e criY . " @
SANTA MONICA
CAUFORNIA
OFFICE OF THE CITY MANAGER 393-9975, ext. 348
1685 MlWl Street, Santa Moniu, c.Iiionua 90401
October 10, 1983
To: OWners of Businesses Licensed ~n Santa Mon~ca
Under Sect~on 6237 of the Munic~pal Code
We would like to be sure you unde~stand that C~ty Council is
considering business l~cense tax changes which would apparently
affect your business.
According to City records, your business is required to main-
tain a business license as a resthome, home for the aged, private
day school, day nursery, day nursery school, private boarding
school or children's board~ng home. The annual license fee for
such bus~nesses ~s determ~ned based upon gross rece~pts tax rates
estab14shed by Section 6225 of the Mun~cipal Code.
On June 21, 1983, City Council endorsed a change in the gross
receipts tax rates established by Sect~on 6225 which ~s outlined
below.
Currently, the business license tax paid is:
$25
Tax Rate on Gross Rece~pts
$ .60 per $1, 000" $10,000
Maximum
Minimum
$2,000
The endorsed tax is:
$25
Tax Rate on Gross Receipts
$1.25 per $1,000:> $500,000
Maximum
None
Min~mum
. If your business has annual gross rece~pt5 of equal to or
less than S952,307, your taxes would decrease or stay the
same under the endorsed rates.
. If your business has annual gross receipts of equal to or
less than $500,000, your taxes due would be $25 annually
under the endorsed rates.
. You can calculate the precise change in your tax liability
by us~ng the formulas presented above.
e
e
Santa Monica Business Owners
Page Two
On October 25, 1983, City Council will consider the ordinance
changes necessary to make these endorsed rate changes law. It was
suggested that your businesses be ~formed directly of the changes
under cons~deration to be sure you clearly understand that you
would be affected. If you have any technical quest~on5 on calcu-
lation of tax rates, please contact our Business License Division
staff at 393-9975, extension 385.
Please contact Meganne Steele at 395-6131 ~f you have other
general questions about the proposed ordinance changes.
Cordially,
~
~ Lynne C. Barrette
~- Deputy City Manager
1
j
/
10/13/83
10/18
10/25
10/26
11/2
11/8
e
e
@
PROPOSED TIMETABLE FOR BLT ORDINANCE WORK
City Counc~l Meeting - public hearing and education of
City Council
City Council Meeting - public hearing and first reading
First draft of Ord~nance apportionment standards
subm~tted to City staff
Staff comments to RA on first draft
City Council Meeting - second reading and vote on
Ordinance
11/9; 11/23; 12/7 Meetings with City - Chamber working group on
apportionment standards
12/30
12/14
Concerns:
BLT adjustment billings/refunds
Final draft of apportionment standards approved by
City Attorney
(1) Timetable for City Attorney's review
(2) Training of BLT administrat~ve staff
e
e
for exclud~ng cha~n stores from the benefits of the h~gh
threshold for the m1nimum tax on reta~l f~rms.
Equity Of Tax Burden Distribut10n Amons Cate9or~es
There appear to be systematic differences 1n the profitab~llty of
reta~l, professions/occupat~ons and services bus~nesses.
Ut1l1z1ng data extracted from Robert Morris Associates '82 Annual
Statement Stud1es, the natlonal pre-tax prof~t margln of the type
of f1rrns on f1le 1n Santa Monica In each of these sectlons are:
reta1l 3.9%, and profess1ons/occupatlons and serV1ces 11.6%.
The compromise rates sign~f1cantly 1mprove the overall equity of
bus~ness license taxes 1n terms of tax rates as a percent of
profit. Under present tax rates,
professions/occupations/services f1rms are taxed at one-third the
share of profit whlch reta1l firms are taxed at. Under
compromise rates, taxes as a share of prof1t would be equallzed
at 2.5% for both sectors at about two m1llion gross recelpts and
would result in an overall smaller range of dlfference ln tax
rates as a share of prof1t.
Effect On Employment Opportunitles
It 1S very unl1kely that employment opportunities for women and
m1norlt1es 1n Santa Mon~ca would be adversely affected as a
result of buslness license tax changes. The comprom1se tax rates
enable Santa Mon~ca to retaln ~ts competltlve position compared
to nearby clties and provide for recognltion of small bus~nesses.
9
e
e
The rates have been structured to preclude any pressure on
businesses to relocate or curtail operat1ons.
To the extent that
Santa Monica is prov1ding a recogn1t1on of small businesses 1n
each sector, opportunit1es for women and m1nor1t1es to succeed 1n
entrepreneur1al act1vities may be enhanced.
Prepared by: Meganne Steele
Sr. Adm1nlstrative Analyst
10