City Waives License Tax Penalties

By Olin Ericksen

February 16 -- Hundreds of Santa Monicans who work from home will find a little extra money in their pockets come tax time after the City announced last week it will refund close to $275,000 collected in penalties and waive an additional $25,000 for residents who failed to register a home business.

Since March of last year, approximately 725 businesses -- not all of them based at home -- were fined for failing to pay an inexpensive and, some say, obscure, business license tax.

The City weeded out the offenders -- many of them writers and instructors who work from home -- using a 2001 California law that allows the City access to State tax records.

The notices spurred scores of residents to complain that the tax and penalties came as a surprise, prompting Finance Director Steve Stark to announce last Friday that the City would be doing an about-face on any penalties.

"We had many calls from people who said, 'I was unaware, or I would have paid," Stark said. "We try to educate the community about who's required to have business licenses. We can obviously do more outreach."

Although the penalties have been rescinded, the City will continue sending out bills for the license tax, Stark said.

"We're still in the process of going through this," Stark said. "It's a methodical process we do in sections."

As the law stands now, any business that makes less than $60,000 a year currently pays a $75 flat tax to the City, while businesses that make more pay a percentage of their income, according to Stark. Currently 18,000 businesses are licensed with the City.

By comparison, the City of Los Angeles does not charge a license tax for businesses that make less than $200,000.

While not all businesses that require a license and were fined are based out of a resident's home, Stark said many of the 50 to 100 complaints the City received were from local screen writers, music teachers and instructors of different types who work from their house or apartments.

For local writer Mark Humphrey, the fine came as a shock.

"I knew nothing about this," Humphrey said. "This is the first I heard that I was a business."

In the Fall of 2004, Humphrey said was informed by a collection agency contracted with the City that he was operating as a business in Santa Monica and owed $703.99 in back taxes since 2001, $270 of that in penalties.

"It's not playing fair, it seems, when you didn't know the law existed," Humphrey said. "If they decide to enforce this and go after people, it's one thing to say, 'Okay we realize you're not aware. Let's start with awareness.

"If they come to people and say, 'Ah ha, we caught you," Humphrey said, "it's not a particularly friendly way to govern."

The City began handing out the notices three years after the State Legislature enacted a bill allowing cities to access State Franchise Tax Board data to help identify businesses that pay business taxes but may not have licenses.

Under the law, the tax board provides cities with the name, address, social security or taxpayer identification number and business activity code of state income tax payers

Some businesses "may have been in operation for years, but since the City had no means of identifying their existence in the past, they were never previously notified of the requirement to obtain a business license," according to a February 11 information item from City staff to the council.

A City ordinance calls for a "penalty of 10 percent a month not to exceed 100 percent of the business license tax due" to businesses operating without a license, according to the report.

"Many of the businesses contacted through the discovery process owe 100 percent penalty," the report said.

Council Member Kevin McKeown, who was contacted by Humphrey and other residents about their plight and successfully lobbied the City for the refund and waiver, said he was happy the City gave residents a break, though he would like to see it taken one step further.

"The larger question here is whether having this tax in the first place encourages home-based businesses," said McKeown. "We should be encouraging people to work from home, not discouraging them."

Eliminating the $75 flat tax, McKeown said, would not only help keep people who make their living through the arts in Santa Monica, but also reduce traffic and "commuter pollution."

"My understanding is that administrative costs eat up much of what the City gets and that the revenue stream from the tax itself is actually quite small," McKeown said.

McKeown said he was awaiting a staff report this Spring before taking a formal stance on the issue.

"Before the council acts, we have to weigh the impacts and benefits of eliminating the tax," McKeown said.

City officials must first find out if the City can afford to eliminate the flat tax and determine how it may affect regulating what type of businesses can operate in the neighborhoods, McKeown said.

McKeown said he would not be in favor of eliminating the tax on businesses that make more than $60,000 and pay a percentage in fees.

"We wouldn't want to eliminate the tax for, say, a tax consulting firm which operates out of someone's house," McKeown said.