SR-207-005
Council Meeting: May 25, 2005 Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Introduction of Ordinance Exempting Small Businesses From Business
License Tax
Introduction
The attached proposed ordinance would create an exemption from the Business
License Tax for small businesses with annual gross receipts up to $40,000. Staff is
proposing this ordinance for Council consideration in response to issues which arose in
conjunction with the recent audit activities.
Background
The Municipal Code establishes a Business License Tax applicable to all persons doing
business within the City. Section 6.04.010 (a) of the Santa Monica Municipal Code
defines business as “Any business, commercial enterprise, trade, calling, vocation,
profession, occupation, or means of livelihood, whether or not carried on for gain or
profit.” The City currently imposes a gross receipts based tax on most businesses
located within Santa Monica. A minimum tax of $75 is levied on gross receipts up to
$60,000. An additional tax is levied on gross receipts over $60,000 at rates ranging
from $1.25 to $5 for each $1,000 over the initial base. A few business activities, such
as administrative/headquarters offices, taxicabs, delivery services, and lunch trucks, are
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taxed on a basis other than gross receipts and are excluded from the proposed
exemption.
In the last year, the City has undertaken auditing activities which have been productive
in several ways. Revenues have been enhanced. Additionally, City staff has gained
important information which should help the Council shape business tax policy in this
area. In particular, auditing activities have shown that there are a significant number of
very small businesses located within the City. As of April, 2005, approximately seventy-
five percent of the new businesses licensed during the audit reported less than $40,000
in gross receipts during 2004. In many instances, these businesses are operated from
the owner’s home.
The tax revenue the City derives from small businesses with up to $40,000 in gross
receipts represents a little less than 3% of business tax collections. However, the
impact of business tax on these businesses can be significant.
In response to the City’s auditing activities, a representative of the Screen Writers Guild
has suggested that the City consider creating a special tax exemption applicable to
screen writers who work in their homes as independent contractors for studios or
production companies. Such independent contractors fall into a special category under
state law, and the Guild has requested that the City give those in this category special
tax treatment by exempting them from the Business License Tax on the general theory
that they do not operate businesses. The Guild made the same request to the City of
Los Angeles. That city denied their request but created, instead, an exemption for all
creative talent in the entertainment industry earning gross receipts of under $300,000
per year.
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Discussion
Staff recommends that the Council approve an exemption for small businesses from
business license tax to foster the growth of start-up and home-based businesses in the
City. In the long run, this step would preserve and enhance the City’s economy.
Moreover, the exemption would likely further the City’s goals of reducing commuter trips
and consequent auto emissions and of preserving and promoting social and cultural
diversity. The proposal to create a uniform small business exemption is preferable to
creating a special exemption for screen writers or artists, which would, in effect, afford a
favored status for one type of business activity. This could raise questions of fairness
and might raise doubts about the City’s commitment to economic and social diversity.
Moreover, the system requested by the guild would be very difficult for the City to
administer. It would require the City to “police” the system by interviewing individual
community members about the exact nature of their activities. This would be both
costly and intrusive. The Guild has argued that many of its members have fluctuating
incomes. Staff’s proposal would take this into account. In years of low gross receipts,
screen writers, as well as other small business people, would be exempt from the
business license tax.
The Los Angeles model is untested. The exemption is extremely high and will deprive
that city of very substantial revenue. The policy rationale underlying the very high
exemption threshold for one class of businesses is unclear. Moreover, the conceptual
boundaries of the special class are vague. In short, the Los Angeles system is very
costly to that city and is difficult to rationalize and administer.
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The proposed ordinance, which would exempt businesses with gross receipts under
$40,000 would provide a benefit to all small businesses, including start up businesses
and various home businesses. Artists and writers with low or fluctuating gross receipts
would benefit from this ordinance. Moreover, the proposed ordinance is fair and
relatively simply and unobtrusive to administer.
In the FY05-06 budget adoption staff report, staff will propose a substantial reduction in
the zoning code compliance review fee for home-based businesses to further benefit
small businesses.
Financial Impacts
Business license tax revenue would be reduced by an estimated 3%, or $320,000, per
year. In addition, the City would forgo other fees and charges collected in connection
with the business license tax (late payment penalties, planning review fees) of
approximately $220,000 for a total potential reduction of up to $540,000. There would
be no reduction in administrative costs since all businesses will continue to register for
an annual business license in order to both ensure that only qualified businesses are
exempted from tax and that all City permitting and other requirements are met.
Recommendation
Staff recommends that the Council introduce the attached ordinance for the first
reading.
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Prepared By: Steve Stark, Director of Finance/City Treasurer
Eva U’Ren, Revenue Manager
Pamela McGarvey, Revenue Operations Supervisor
Attachments: Ordinance
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City Council Meeting 5-25-05 Santa Monica, California
ORDINANCE NUMBER _________ (CCS)
(City Council Series)
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
SANTA MONICA ADDING SECTION 6.04.025 TO THE SANTA MONICA MUNICIPAL
CODE RELATING TO BUSINESS LICENSE TAX EXEMPTIONS FOR SMALL
BUSINESSES
THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES HEREBY
ORDAIN AS FOLLOWS:
1.
Section 6.04.025 is hereby added to the Santa Monica Municipal Code to
read as follows:
Section 6.04.025. Small business exemption.
(a) The requirements of this Chapter relating to the
payment of business license taxes shall not apply to the
operator of any small business if the business operates from
a physical location within the City and the tax liability of the
business would otherwise be calculated based upon gross
receipts.
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(b) For purposes of this Section, the term “small
business” is defined as a business with total taxable and
nontaxable annual gross receipts from within and without the
City during the preceding calendar year that do not exceed
Forty Thousand Dollars ($40,000.00).
(c) Any person claiming exemption from the
requirement of paying the business license tax under this
Section shall be required to obtain a business license and
timely file for exemption and subsequent renewals before the
delinquency date. The failure to timely file or renew prior to
the date the taxes would otherwise have been delinquent
pursuant to Section 6.04.160, shall render inapplicable the
exemption provided in subsection (b) above and shall
subject the person to the tax that would otherwise be
payable as well as to any interest and penalty applicable
thereto. Persons claiming exemption shall also be required
to pay the business license application fee, renewal
processing fee, all other applicable City fees, and to obtain
all permits required for the operation of the business.
(d) Any person claiming exemption under this Section
shall submit documentation evidencing the total taxable and
nontaxable gross receipts of the applicant in support of its
initial exemption registration and the annual exemption
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renewal. Such documentation shall comply with the
requirements established by the Finance Director to ensure
the accuracy and validity of the City’s determination on the
exemption claim.
2.
Any provision of the Santa Monica Municipal Code or appendices thereto
inconsistent with the provisions of this Ordinance, to the extent of such inconsistencies
and no further, is hereby repealed or modified to that extent necessary to effect the
provisions of this Ordinance.
3.
If any section, subsection, sentence, clause, or phrase of this Ordinance
is for any reason held to be invalid or unconstitutional by a decision of any court of
competent jurisdiction, such decision shall not affect the validity of the remaining
portions of this Ordinance. The City Council hereby declares that it would have passed
this Ordinance and each and every section, subsection, sentence, clause, or phrase not
declared invalid or unconstitutional without regard to whether any portion of the
ordinance would be subsequently declared invalid or unconstitutional.
4.
The Mayor shall sign and the City Clerk shall attest to the passage of this
Ordinance. The City Clerk shall cause the same to be published once in the official
newspaper within 15 days after its adoption. This Ordinance shall become effective 30
days from its adoption.
APPROVED AS TO FORM:
_________________________
MARSHA JONES MOUTRIE
City Attorney
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