SR-09-24-2013-11ACity Council Meeting:
Agenda Item: 11A
To: Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance
Subject: Resolution Waiving Past Due Business License Taxes, Penalties and
Related Fees
Recommended Action
Staff recommends that the City Council adopt the attached Resolution waiving past due
business license taxes, penalties and related fees for individuals or businesses
operating residential rentals of three units or less and artists who create artwork on
location at the Santa Monica Airport but do not sell the art on site, for all past fiscal
years including the 2013 -14 fiscal year.
Executive Summary
A recent review of business license operations revealed that the City has not been
requiring individuals or businesses that own /sublease and rent three or fewer residential
units, or artists who create artwork on location at the Santa Monica Airport as part of
their livelihood but do not sell the art on site, to secure a Business License. Beginning
immediately, these businesses will be required to obtain a business license. Given that
the practice of not requiring business licenses for these business activities was based
on staffs previous interpretations of the Santa Monica Municipal Code (SMMC) and not
the fault of the participants, the attached resolution waives past due business license
taxes and associated penalties and fees for all past years including the 2013 -14 fiscal
year, to provide staff time to identify the affected individuals and companies.
Discussion
A recent review of business license operations revealed that individuals or businesses
that own /sublease and rent three or fewer residential units, or artists who create artwork
on Jocation at the Santa Monica Airport but do not sell the art on site, have not been
required to obtain a Business License from the City, as are all others that do business in
Santa Monica. To maintain a fair and consistent application of the law towards all
members of the community, staff recommends that, effective immediately, these
individuals and businesses will be required to obtain business licenses by filing a
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business license application; however, they will not be required to pay the taxes that are
past due.
As staff continues its efforts to identify unlicensed businesses operating in the City, staff
is required to collect all license tax that is owed for past years for any business that is
being brought into compliance. These taxes are past due and are a collectable debt.
In addition to all prior years, taxes for the 2013 -14 fiscal year became past due as of
August 31, 2013 and are a collectible debt. However, since non - payment of business
license taxes was not the fault of the individuals or businesses engaged in the business
activities outlined in this report, adoption of the attached resolution will eliminate the
City's requirement to seek payment of these past due taxes and related fees and
penalties. City Council has the authority to waive a collectable debt owed to the City by
resolution.
As part of staffs efforts to identify unlicensed businesses, staff will be conducting
educational efforts to inform these businesses of the requirement to obtain a business
license over the course of the next year.
Artists at the Santa Monica Airport
In the case of artists who create art at the Airport but do not actively sell their art from
the same location, the fact that the sales are not taking place at the Airport location
does not negate the fact that a business activity is taking place. The SMMC defines a
business as "Any business, commercial enterprise, trade, calling, vocation, profession,
occupation, or means of livelihood, whether or not carried on for gain or profit." An artist
who creates art as a hobby is clearly not required to obtain a business license.
However, any artist who creates art as a means of livelihood is required to obtain a
business license. If an artist sells his or her art at a physical location outside of Santa
Monica (e.g. an art fair), the artist would be able to apportion their taxes accordingly, by
reducing the total amount of gross receipts attributable to Santa Monica.
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There are approximately 60 artists either leasing or subleasing space at the Airport who
would potentially be eligible for a waiver of tax under the proposed resolution. Artists
who do not fall under the specific conditions noted in the resolution and who are
unlicensed would not be eligible for the waiver provided in the request; they would
therefore be required to pay past due taxes and penalties.
Artists reporting less than $40,000 in worldwide gross receipts annually would be
eligible to claim the small business tax exemption and pay no tax. Artists who report
gross receipts of $60,000 or less would be subject to business license tax of $75
annually. If gross receipts exceed $60,000, artists would pay $1.50 for every $1,000 in
gross receipts in excess of $60,000. Staff will be performing outreach to identify these
individuals and businesses and educate them on the requirement to obtain a business
license.
Residential Rentals — Three Units or Less
The SMMC clearly establishes a business classification and tax rate for the rental of
residential property of more than three units when such rentals are for residential use
and where such units are located on the same or an adjoining property. However, even
though the SMMC does not include the rental of residential property of three units or
less in the same classification as the rental of residential property of more than three
units, it does not specifically exempt these businesses. Santa Monica Municipal Code
(SMMC) Section 6.04.020 requires a business to obtain a business license unless
specially exempted by law.
Although information is not available from the County Assessor's office on the number
of properties with two or three units or the number of single family homes that serve as
rentals, staff has determined from a report issued on March 22, 2013 by the Rent
Control Department that there are 1,080 rent controlled two and three unit properties
that are required to obtain a business license. Since this only includes rent controlled
properties, the total number of two and three unit properties is likely more than1,080. In
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addition to two and three unit properties, a search of a residential rental website
displayed 96 single family homes and condos for rent with rents ranging from $950 to
$40,000 per month.
Individuals and businesses that collect less than $5,000 in total monthly rents, and
therefore $60,000 or less in gross receipts, would be subject to business license taxes
of $75 annually. Any business that reports less than $40,000 in worldwide gross
receipts annually would be eligible to claim the small business tax exemption and pay
no tax. Staff will be performing outreach to identify these individuals and businesses
and inform them of the requirement to obtain a business license.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended action. Staff will return to Council if specific budget actions are required
in the future. Staff estimates that with a 75% compliance rate in FY 2014 -15, the City
would generate an additional $86,000 in business license tax revenue.
Prepared by: Salvador M. Valles, Business & Revenue Operations Manager
Approved:
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Gigi ecavaI es- H es
Director of Finance
Attachment:
A. Resolution
Ell
Forwarded to Council:
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Rod Gould
City Manager
Reference:
Resolution No. 10766
(CCS)